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CA Foundation · Accounting · Partnership and LLP Accounts

A firm has capital employed of ₹8,00,000 and the normal rate of return in the industry is 10%. Its average profit is ₹1,20,000. Goodwill is valued at 3 years' purchase of super profit. What is the value of goodwill?

Goodwill is ₹1,20,000. Normal profit at 10% on ₹8,00,000 is ₹80,000, so super profit is ₹1,20,000 minus ₹80,000, which is ₹40,000. Three years' purchase of this super profit gives goodwill of ₹1,20,000.

  1. A₹1,20,000Correct
  2. B₹3,60,000
  3. C₹4,80,000
  4. D₹1,60,000

Explanation

Normal profit = 10% of 8,00,000 = 80,000. Super profit = 1,20,000 - 80,000 = 40,000. Goodwill = 40,000 x 3 = 1,20,000. The option ₹3,60,000 wrongly multiplies the whole average profit by 3 instead of the super profit.

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