A partnership firm expects a normal rate of profit of 10\% on its total capital of ₹50 crores. In the current year the firm earned a profit of ₹9 crores. Using the Super‑Profit method and a capitalization rate of 20\%, calculate the goodwill of the firm.
Answer
Goodwill = ₹20 crores
The correct answer is Goodwill = ₹20 crores — Goodwill = super profit ÷ capitalization rate = ₹4 crores ÷ 0.20 = ₹20 crores.
Step-by-step solution
- Normal profit = 10\% of ₹50 crores = ₹5 crores.
- Super profit = actual profit – normal profit = ₹9 crores – ₹5 crores = ₹4 crores.
- Goodwill = super profit ÷ capitalization rate = ₹4 crores ÷ 0.20 = ₹20 crores.
Common mistake: Forgetting to subtract normal profit before dividing by the capitalization rate
Concept tested: Super‑profit method of goodwill valuation
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