Question : Average profit earned by a firm is Rs. 2,50,000 which includes overvaluation of stock of Rs 10,000 on average basis. Capital invested in the business is Rs. 14,00,000 and the normal rate of return is 15%. Calculate goodwill of the firm on the basis of 4 times the super profit.
Option 1: Rs 30,000
Option 2: Rs 40,000
Option 3: Rs 1,20,000
Option 4: None of these
Correct Answer: Rs 1,20,000
Solution : Answer = Rs 1,20,000
Average Profit = Rs. 2,50,000 Overvaluation of Stock = Rs. 10,000
Actual Average Profit = Rs. 2,50,000 = Rs. 10,000 (Note) = Rs. 2,40,000
Normal Profit = Capital Employed (Investment) × Normal Rate of Return/100
= Rs. 14,00,000 × = Rs. 2,10,000
Super Profit = Actual Average Profit - Normal Profit = Rs. 2,40,000 – Rs. 2,10,000 = Rs.30,000
Goodwill = Super Profit × 4
= Rs. 30,000 × 4 = Rs. 1,20,000.
Note: Overvaluation of stock is deducted as it increases the net profit. Hence, the correct option is 3.
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