Multiple choice

ABC are three partners in a firm, they decided to admit D a fourth partner in the firm with 1/4th share of profit and loss in the firm. Firm decides to revalue the goodwill by capitalizing super profit @10%. What is the goodwill of the firm average profit and normal profit were Rs. 20,000 and 13,000 respectively?

  1. Rs. 70,000

  2. Rs, 75,000

  3. Rs. 7,000

  4. Rs. 13,000
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A Correct answer
Explanation

Super profit is calculated as Average Profit - Normal Profit, which is 20,000 - 13,000 = 7,000. Goodwill is calculated by capitalizing super profit at 10%, which is 7,000 / 0.10 = 70,000.

AI explanation

First, calculate the super profit by subtracting normal profit from average profit: 20000 minus 13000 equals 7000. Next, use the capitalization of super profit method by dividing the super profit by the normal rate of return. Dividing 7000 by 0.10 yields a goodwill value of 70000.

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