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A firm has an average profit of Rs.60,000. Rate of return on capital employed is 12.5% p.a.Total capital employed in the firm was Rs.4,00,000. Goodwill on the basis of two years purchase of super profits is
- a)Rs.20,000
- b)Rs.15,000
- c)Rs.10,000
- d)None of the above
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
A firm has an average profit of Rs.60,000. Rate of return on capital e...
Calculation of Goodwill
Given:
Average profit = Rs.60,000
Rate of return on capital employed = 12.5%
Total capital employed = Rs.4,00,000
Step 1: Calculation of normal profit
Normal profit = Capital employed × Rate of return
Normal profit = 4,00,000 × 12.5%
Normal profit = Rs.50,000
Step 2: Calculation of Super Profit
Super profit = Average profit – Normal profit
Super profit = Rs.60,000 – Rs.50,000
Super profit = Rs.10,000
Step 3: Calculation of Goodwill
Goodwill = Super profit × Number of years purchase
Number of years purchase = 2 (Given)
Goodwill = Rs.10,000 × 2
Goodwill = Rs.20,000
Therefore, the value of Goodwill on the basis of two years purchase of super profits is Rs.20,000.
Explanation:
Goodwill is an intangible asset that represents the excess of the purchase price of a business over the fair market value of its net assets. It arises when the earning capacity of a business is more than the normal earnings of similar businesses in the same industry.
In this question, we are given the average profit of a firm, rate of return on capital employed, and total capital employed in the firm. Using this information, we can calculate the normal profit and super profit of the firm.
Normal profit is the profit that a firm earns by investing its capital at the rate of return prevailing in the market. Super profit is the profit that a firm earns over and above the normal profit due to its superior earning capacity.
Once we have calculated the super profit, we can use the number of years purchase method to calculate the value of goodwill. The number of years purchase is the number of years of super profits that a purchaser is willing to pay for the business.
In this question, we are given that the number of years purchase is 2. Therefore, we can multiply the super profit by 2 to get the value of goodwill.
Hence, the value of Goodwill on the basis of two years purchase of super profits is Rs.20,000.
Given:
Average profit = Rs.60,000
Rate of return on capital employed = 12.5%
Total capital employed = Rs.4,00,000
Step 1: Calculation of normal profit
Normal profit = Capital employed × Rate of return
Normal profit = 4,00,000 × 12.5%
Normal profit = Rs.50,000
Step 2: Calculation of Super Profit
Super profit = Average profit – Normal profit
Super profit = Rs.60,000 – Rs.50,000
Super profit = Rs.10,000
Step 3: Calculation of Goodwill
Goodwill = Super profit × Number of years purchase
Number of years purchase = 2 (Given)
Goodwill = Rs.10,000 × 2
Goodwill = Rs.20,000
Therefore, the value of Goodwill on the basis of two years purchase of super profits is Rs.20,000.
Explanation:
Goodwill is an intangible asset that represents the excess of the purchase price of a business over the fair market value of its net assets. It arises when the earning capacity of a business is more than the normal earnings of similar businesses in the same industry.
In this question, we are given the average profit of a firm, rate of return on capital employed, and total capital employed in the firm. Using this information, we can calculate the normal profit and super profit of the firm.
Normal profit is the profit that a firm earns by investing its capital at the rate of return prevailing in the market. Super profit is the profit that a firm earns over and above the normal profit due to its superior earning capacity.
Once we have calculated the super profit, we can use the number of years purchase method to calculate the value of goodwill. The number of years purchase is the number of years of super profits that a purchaser is willing to pay for the business.
In this question, we are given that the number of years purchase is 2. Therefore, we can multiply the super profit by 2 to get the value of goodwill.
Hence, the value of Goodwill on the basis of two years purchase of super profits is Rs.20,000.
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A firm has an average profit of Rs.60,000. Rate of return on capital employed is 12.5% p.a.Total capital employed in the firm was Rs.4,00,000. Goodwill on the basis of two years purchase of super profits isa)Rs.20,000b)Rs.15,000c)Rs.10,000d)None of the aboveCorrect answer is option 'A'. Can you explain this answer?
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