Q.A partnership firm earned net profits during the last three years as follows : 2016 : ₹ 20,000, 2017 : ₹ 17,000 and 2018 : ₹ 23,000. The capital investment of the firm throughout the above mentioned period has been ₹ 80,000. Having regard to the risk involved, 15% is considered to be a fair return on capital employed in the business. Calculate the value of goodwill on the basis of 2 years purchase of super profit.

This method values goodwill only on the portion of a firm's profit that exceeds what a similar firm would normally earn on the same capital. First, Normal Profit = Capital Employed × Normal Rate of Return, where Capital Employed is the net capital actually invested in the business (total trading assets excluding goodwill/fictitious assets, minus outside liabilities) and the Normal Rate of Return is the rate similar firms in the same industry and risk category normally earn. Then, Super Profit = Average Profit − Normal Profit. Finally, Goodwill = Super Profit × Number of Years' Purchase. Where average profit needs correcting for an item not yet charged against it — …