(Super Profit, Overvaluation of Profit).
Average profit earned by a firm is Rs. 2,50,000 which includes overvaluation of stock of Rs. 10,000 on an 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.

Explanation

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) `xx` Normal Rate of Return/100
` " " ` = Rs. 14,00,000 `xx 15/100` = 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 `xx` 4
` " " ` = Rs. 30,000 `xx` 4 = Rs. 1,20,000.
Note: Overvaluation of stock is deducted as it increased the net profit.