A firm's average profits are Rs. 70,000. It includes an abnormal profit of Rs. 5,000. Capital invested in the business is Rs. 5,50,000 and the normal rate of return is 10% Calculate goodwill at four times the super profit.

Explanation

(i) Calculation of Actual Average Profit :
`{:("Average Profit",,"70,000"),("Less : Abnormal Profit",,"5,000"),("Actual Average Profit :",,bar ul("65,000")):}`
(ii) Normal Profits = Capital Inested `xx ("Normal Rate of Return")/(100)`
= 5,50,000 `xx (10)/(100) =` Rs. 55,000
(iii) Super Profit = Actual Average Profit - Normal Profit
65,000 - 55,000 = Rs. 10,000
(iv) Goodwill = Super Profit `xx` Number of years purchased
= Rs. 10,000 `xx` 4 = Rs. 40,000