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Class 12AccountancyPartnership Accounts - Basic ConceptsGoodwillExpert
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A firm's average capital is ₹10,00,000 and its average profit is ₹1,60,000. The normal rate of return is 12%. What will be the firm's goodwill under the super profit method at 3 years' purchase?

Answer and explanation

Correct answer: ₹1,20,000

Normal profit = ₹10,00,000 × 12% = ₹1,20,000. Super profit = Average profit − Normal profit = ₹1,60,000 − ₹1,20,000 = ₹40,000. Therefore, Goodwill = Super profit × Years' purchase = ₹40,000 × 3 = ₹1,20,000. Option B incorrectly multiplies the average profit directly by 3. Exam tip: First calculate normal profit, deduct it from average profit to find super profit, and then multiply by the years' purchase.

Related tags

Partnership AccountsGoodwillSuper Profit MethodAverage CapitalYears PurchasePartnership Accounts Basic ConceptsAccountancyClass 12 Mcq
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10 more MCQs
  1. 1What is the basic meaning of goodwill in partnership?
  2. 2How is goodwill classified as an asset in accounting?
  3. 3What effect does a firm's good reputation have on its goodwill?
  4. 4Why is a stable customer base important for goodwill?
  5. 5What is the accounting treatment of purchased goodwill?
  6. 6Why is self generated goodwill generally not recorded in books?
  7. 7How is goodwill calculated under average profit method?
  8. 8The average profit is ₹50,000, and goodwill is valued at two years’ purchase. What is the value of goodwill?
  9. 9The profits for the last three years are ₹30,000, ₹45,000 and ₹60,000, respectively. What is the average profit used for calculating goodwill?
  10. 10The average profit for four years is ₹80,000, and goodwill is valued at three years’ purchase. What will be the value of goodwill?
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