The average net profit expected of the firm in future are Rs 68000 per...
Valuation of Goodwill Based on Super Profit
Given Information:
- Net profit expected: Rs 68000 per year
- Capital invested: Rs 350000
- Rate of interest: 12%
- Partner's remuneration: Rs 8000 per year
Calculation of Super Profit:
Super Profit = Average Net Profit - Normal Profit
Normal Profit = Capital Invested × Rate of Interest = 350000 × 12% = Rs 42000
Super Profit = 68000 - 42000 = Rs 26000
Calculation of Goodwill:
Goodwill = Super Profit × Number of Years Purchase
Number of Years Purchase = 2 (given)
Goodwill = 26000 × 2 = Rs 52000
Explanation:
Goodwill is an intangible asset that is the difference between the total value of the business and the value of its net assets. It represents the reputation, customer base, brand value, and other non-physical assets of the business. The value of goodwill can be calculated based on the excess profit generated by the business over the normal profit expected from the capital invested.
In this case, the super profit generated by the business is Rs 26000 per year, which is the excess profit over the normal profit of Rs 42000 (capital invested × rate of interest). The value of goodwill is calculated by multiplying the super profit by the number of years purchase, which is 2 in this case.
Therefore, the value of goodwill based on two years purchase of super profit is Rs 52000.