Multiple choice

Capital employed by a partnership firm is Rs. $1,00,000$. Its average profit is Rs. $20,000$. Normal rate of return is $15\%$. Value of goodwill.

  1. Rs. $33,333$
  2. Rs. $30,000$
  3. Rs. $23,333$
  4. Rs. $43,667$
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A Correct answer
Explanation

Super profit = Average profit - (Normal rate * Capital employed) = 20,000 - (0.15 * 100,000) = 20,000 - 15,000 = 5,000. Goodwill is typically calculated as super profit multiplied by a number of years purchase, but since no years are given, the capitalized value of super profit is 5,000 / 0.15 = 33,333.

AI explanation

Using the capitalization of average profits method, the total value of the firm is calculated by dividing the average profit by the normal rate of return. Dividing Rs. 20,000 by 15 percent gives a total firm value of Rs. 1,33,333. Subtracting the capital employed of Rs. 1,00,000 from this total firm value gives a goodwill of Rs. 33,333.

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