Q.From the following Balance Sheet figures, total assets of a firm (excluding goodwill) are ₹15,00,000 and outside liabilities are ₹5,00,000. The normal rate of return in this business is 12% and the firm's average profit is ₹1,50,000. Calculate the goodwill of the firm at 2 years' purchase of the super profit.

When capital employed is not given directly, it must first be worked out from the Balance Sheet as total trading assets minus outside liabilities, before the normal profit and super profit can be found.

Step 1 — Compute Capital Employed:

Capital Employed = Total Assets (excluding goodwill) − Outside Liabilities = 15,00,000 − 5,00,000 = ₹10,00,000

Step 2 — Compute Normal Profit:

Normal Profit = Capital Employed × Normal Rate of Return = 10,00,000 × 12% = ₹1,20,000

Step 3 — Compute Super Profit: …

Cross-check using the Capitalization of Super Profit variant: Super Profit × (100 ÷ Normal Rate) = 30,000 × (100÷12) = 2,50,000, which is the capitalized value of the super profit — a different figure from the 2-years'-purchase goodwill above, since the t …

Students often forget to subtract outside liabilities from total assets and use total assets alone as capital employed, which overstates the normal pro …