Question

11. The net tangible assets of a firm are worth Rs3,70,000 and the average profits of last four years amount to Rs 54,000. Calculate the value of goodwill if the reasonable rate of return on capital invested is 10%​


@JSP Hi Sis

Answer 1

Answer:

Solution

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(i) Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 300000

Step 2: Calculation of Normal Profit:

Normal Profit= 300000 * [10/100]

= 30000

Step 3: Calculation of Average Profit:

Average Profit= 50000

Step 4: Calculation of Super Profit:

Super Profit= 50000-30000

= 20000

Step 5: Calculation of Goodwill:

Goodwill= Super Profit * Number of years' of purchase

= 20000 * 3

= 60000

(ii) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 300000

Step 2: Calculation of Normal Profit:

Normal Profit= 300000 * [10/100]

= 30000

Step 3: Calculation of Average Profit:

Average Profit= 50000

Step 4: Calculation of Super Profit:

Super Profit= 50000-30000

= 20000

Step 5: Calculation of Goodwill:

Goodwill= Super profit* [100/Normal Rate of return]

= 20000 * [100/10]

= 200000

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