John earns an annual net income of £19,500 from a photography business which he runs.
He has capital of £35,000 invested in this business. If he ceased running his own business and worked as an employee in another photographic business he would earn a salary of £11,000 per annum.
If he could invest his capital elsewhere in a project with the same degree of risk as his own business he could expect a return of 6.5% per annum.
If goodwill in this type of firm is valued at five years’ purchase of super-profits, the goodwill of John’s business is?
Select ONE answer:
- £31,125
- £37,500
- £40,225
- £42,500
Show your workings to arrive at your answer, and explain and justify your reasons:
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This multiple-choice question is suitable for Accounting KS5 classes.
The answer is 1
- Correct – Current annual earnings £19,500, however alternative annual earnings = Salary £11,00 + Interest (£35,000 * 6.5%) £2,275 = Total £13,275. If Annual super-profit is £6,225, therefore, 5 years purchase = £31,125.
- Not correct
- Not correct
- Not correct
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