Average Profit ₹ 4,40,000, Capital Employed ₹ 8,00,000; Normal Rate of Return 15%. Management Cost during this period is estimated to be ₹ 2,00,000. Calculate the value of goodwill on the basis of two years’ purchase of super profit.

Solution:-

Average Profit for Valuation of Goodwil = ₹ 4,40,000 – ₹ 2,00,000 (Partner’s Remuneration)

Average Profit for Valuation of Goodwill = ₹ 2,40,000

Normal Profit = Capital Employed × Normal Rate of Return

Normal Profit = 8,00,000 × 15/100 = ₹ 1,20,000

Super Profit = Average Profit – Normal Profit

Super Profit = 2,40,000 – 1,20,000 = ₹ 1,20,000

Goodwill = Super Profit × No. of years of purchase

Goodwill = 1,20,000 × 2 = ₹ 2,40,000