Question

3. The books of a business showed that the firm's capital employed on December 31, 2015,
Rs. 5,00,000 and the profits for the last five years were: 2010-Rs. 40,000: 2012-Rs. 50,000;
2013-Rs. 55,000; 2014- Rs.70,000 and 2015-Rs. 85,000. You are required to find out the
value of goodwill based on 3 years purchase of the super profits of the business, given
that the normal rate of return is 10%.​

Answer 1

Answer:

goodwill= 20000

superprofit× year(10000×2)

Answer 2

CORRECT QUESTION :

• ➲ The books of a business showed that the firm's capital employed on December 31, 2015 is Rs. 5,00,000 and the profits for the last five years were : 2011 - Rs. 40,000: 2012 - Rs. 50,000; 2013 - Rs. 55,000; 2014 - Rs.70,000 and 2015 - Rs. 85,000. You are required to find out the value of goodwill based on 3 years purchase of the super profits of the business, given that the normal rate of return is 10%.

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ANSWER :

• ❖ If the books of a business showed that the firm's capital employed on December 31, 2015 is Rs. 5,00,000 and the profits for the last five years were: 2011 - Rs. 40,000: 2012 - Rs. 50,000; 2013 - Rs. 55,000; 2014 - Rs.70,000 and 2015 - Rs. 85,000 and the normal rate of return is 10%; then the value of Goodwill based on 3 years purchase of the super profits of the business is Rs. 30,000.

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SOLUTION :

❒ Given :-

• Capital Employed on December 31, 2015 = Rs. 5,00,000

• Profit for the year 2011 = Rs. 40,000

• Profit for the year 2012 = Rs. 50,000

• Profit for the year 2013 = Rs. 55,000

• Profit for the year 2014 = Rs. 70,000

• Profit for the year 2015 = Rs. 85,000

• Normal Rate of Return = 10%

• Number of years purchase = 3 years

❒ To Calculate :-

• Value of Goodwill based on Super Profit of the firm = ?

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❒ Step 1 : Calculation of Average Profit :-

Here,

• Profit for the year 2011 = Rs. 40,000

• Profit for the year 2012 = Rs. 50,000

• Profit for the year 2013 = Rs. 55,000

• Profit for the year 2014 = Rs. 70,000

• Profit for the year 2015 = Rs. 85,000

• No. of years = 5 years

We know that,

• $\dag \: \: \underline{ \boxed{ \sf{ \: Average \: \: Profit = \dfrac{Sum \: \: of \: \: the \: \: profits \: \: of \: \: given \: \: years }{No. \: \: of \: \: years} \: }}}$

Using this formula we get,

• $\bigstar \: \: \sf{ \: Average \: \: Profit = \dfrac{Sum \: \: of \: \: the \: \: profits \: \: of \: \: given \: \: years }{No. \: \: of \: \: years} \: }$

➜ Average Profit = $\sf{\dfrac{Rs. \: 40,000 + Rs. \: 50,000 + Rs. \: 55,000 + Rs. \: 70,000 + Rs. \: 85,000}{5}}$

➜ Average Profit = $\sf{\dfrac{Rs. 3,00,000}{5}}$

➜ Average Profit = Rs. 60,000

• So, the Average Profit of the firm = Rs. 60,000.

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❒ Step 2 : Calculation of Normal Profit :-

Here,

• Capital Employed = Rs. 5,00,000

• Normal Rate of Return = 10%

We know that,

• $\dag \: \: \underline{ \boxed{\sf{\: Normal \: \: Profit = \dfrac{Capital \: \: Employed \times Normal \: \: Rate \: \: of \: \: Return}{100} \: }}}$

Using this formula we get,

• $\bigstar \: \: \sf{\: Normal \: \: Profit = \dfrac{Capital \: \: Employed \times Normal \: \: Rate \: \: of \: \: Return}{100} \: }$

➜ Normal Profit = $\sf{\dfrac{Rs. \: 5,00,000 \times 10}{100}}$

➜ Normal Profit = $\sf{\dfrac{Rs. \: 5,00,0000}{100}}$

➜ Normal Profit = Rs. 50,000

• So, the Normal Profit of the firm = Rs. 50,000.

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❒ Step 3 : Calculation of Super Profit :-

Here,

• Average Profit of the firm = Rs. 60,000

• Normal Profit of the firm = Rs. 50,000

We know that,

• $\dag \: \: \underline{ \boxed{ \sf{ \: Super \: \: Profit = Average \: \: Profit - Normal \: \: Profit \: }}}$

Using this formula we get,

• $\bigstar \: \: \sf{ \: Super \: \: Profit = Average \: \: Profit - Normal \: \: Profit \: }$

➜ Super Profit = Rs. 60,000 - Rs. 50,000

➜ Super Profit = Rs. 10,000

• So, the Super Profit of the firm = Rs. 10,000.

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❒ Step 4 : Calculation of Value of Goodwill :-

Here,

• Super Profit of the firm = Rs. 10,000

• No. of years purchase = 3 years

∴ Value of Goodwill = Super Profit of the firm × No. of years purchase

➨ Value of Goodwill = Rs. 10,000 × 3

➨ Value of Goodwill = Rs. 30,000

• Hence, the Value of Goodwill of the firm is Rs. 30,000.