The net profits of a partnership business, after providing for income tax for the last five years were : Rs. 80,000; Rs. 1,00,000; Rs. 1,20,000; Rs. 1,25,000 and Rs. 2,00,000. The capital employed in the business is Rs. 10,00,000 and the normal rate of return is 10%. The value of goodwill on the basis of the annuity method; taking the present value of the annuity of Re 1 for 5 years at 10% is 3.7907 (approx); will be

The correct answer is Rs. 94,770 (approx)

Key Points Goodwill is the value of a company's reputation earned through time in terms of predicted future profits over and above normal profits.

Goodwill is an intangible real asset that cannot be seen or felt but may be bought and sold in reality.

Important PointsCapital employed in the business is Rs. 10,00,000

 Normal Profit = Capital Employed x Normal rate of return/100

 Normal Profit = 10,00,000 x 10/100 = ₹ 1,00,000

Average profits = (80000 + 100000 + 120000 + 125000 + 200000)/5

Average profits = 625000 / 5 = 1,25,000

Super profit = Average profit - Normal profit

Super profit = 1,25,000 - 1,00,000

Super profit = 25000

Goodwill = Super profit x Annuity rate

Goodwill = 25000 x 3.7907

Goodwill = ₹ 94767.5 = ₹ 94770 (Approx)