A firm's average profit is ₹1,20,000, normal rate 10%, capital employed ₹8,00,000. Goodwill by capitalisation of average profit method will be: (Capitalised value of average profit less net assets)
Goodwill of a firm is valued at 2 years purchase of average profits of last 4 years. Profits: 2019- ₹20,000; 2020- ₹30,000; 2021- ₹40,000; 2022- ₹50,000 (including speculative profit ₹10,000). Average profit for goodwill will be:
Explanation:
Speculative profit is excluded. Normal profit for last year = 40,000 - 10,000 = 30,000. Total profits: 25,000 + 30,000 + 35,000 + 30,000 = 1,20,000. Average = ₹30,000.
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