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CS Executive · Corporate Accounting and Financial Management · Related Aspects of Company Accounts

Average profit of Kaveri Ltd. is ₹5,00,000 and capital employed is ₹20,00,000. Normal rate of return is 15%. Under the super profit method, goodwill is valued at 3 years' purchase of super profit. What is the goodwill?

Goodwill is ₹6,00,000. Normal profit is 15% of ₹20,00,000, which is ₹3,00,000. Super profit is ₹5,00,000 minus ₹3,00,000, which is ₹2,00,000. Multiplying by three years' purchase gives goodwill of ₹6,00,000.

  1. A₹6,00,000
  2. B₹3,00,000Correct
  3. C₹2,00,000
  4. D₹15,00,000

Explanation

Normal profit = 15% of 20,00,000 = ₹3,00,000. Super profit = 5,00,000 - 3,00,000 = ₹2,00,000. Goodwill = 2,00,000 x 3 = ₹6,00,000. Option ₹3,00,000 wrongly uses normal profit... check: correct is ₹6,00,000.

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