The average profit of a business over the last 5 years amounting to ₹ 60,000. The normalcommercial yield on capital invested in such a business is Deemed to be 10% per annum. Thenet capital invested in the business is ₹ 5,00,000. amount of goodwill, if it is based on 3 yearspurchase of last 5 years super profit will be(A) ₹100000(B) ₹180000(C) ₹ 30000(D) ₹ 150000
Question
The average profit of a business over the last 5 years amounting to ₹ 60,000. The normalcommercial yield on capital invested in such a business is Deemed to be 10% per annum. Thenet capital invested in the business is ₹ 5,00,000. amount of goodwill, if it is based on 3 yearspurchase of last 5 years super profit will be(A) ₹100000(B) ₹180000(C) ₹ 30000(D) ₹ 150000
Solution 1
To calculate the amount of goodwill based on a 3-year purchase of the last 5 years' super profit, we need to follow these steps:
Step 1: Calculate the average annual profit over the last 5 years. The given average profit is ₹60,000.
Step 2: Calculate the normal commercial yield on capital invested. The given yield is 10% per annum.
Step 3: Calculate the net capital invested in the business. The given net capital is ₹5,00,000.
Step 4: Calculate the super profit by subtracting the normal commercial yield from the average annual profit. Super profit = Average profit - (Net capital invested * Normal commercial yield)
Step 5: Calculate the total super profit over the last 5 years by multiplying the super profit by 5. Total super profit = Super profit * 5
Step 6: Calculate the amount of goodwill based on a 3-year purchase. Goodwill = Total super profit * (3/5)
By following these steps, we can determine the amount of goodwill.
Solution 2
To calculate the amount of goodwill based on a 3-year purchase of the last 5 years' super profit, we need to follow these steps:
Step 1: Calculate the average annual profit over the last 5 years. The given average profit is ₹60,000.
Step 2: Determine the normal commercial yield on capital invested in the business, which is deemed to be 10% per annum.
Step 3: Calculate the net capital invested in the business, which is ₹5,00,000.
Step 4: Calculate the super profit by subtracting the normal commercial yield from the average annual profit. Super Profit = Average Profit - (Net Capital Invested * Normal Commercial Yield)
Super Profit = ₹60,000 - (₹5,00,000 * 10%) = ₹60,000 - ₹50,000 = ₹10,000
Step 5: Calculate the amount of goodwill based on the 3-year purchase of the super profit. Goodwill = Super Profit * 3
Goodwill = ₹10,000 * 3 = ₹30,000
Therefore, the amount of goodwill, if it is based on a 3-year purchase of the last 5 years' super profit, will be ₹30,000. Hence, the correct option is (C) ₹30,000.
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