Question

41. A business has earned average profit of 8,00,000 during the last few years and the normal rate of
return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method; and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.
Assets of the business were 80,00,000 and its external liabilities 14,40,000.​

Answer 1

Valuation of Goodwill :

Average Profit = 800000

Capital employed = Total Assets - External Liabilities

Capital employed = 8000000 - 1440000

= 6560000

Normal Profit = Capital employed x Normal rate of return

Normal Profit = 6560000 x 10/100

= 656000

1) For Calculation of Super Profit :

Super Profit = Average Profit - Normal Profit

Super Profit = 800000 - 656000

= 144000

Value of Goodwill = Super Profit x No of year purchased

Value of Goodwill = 144000 x 3

= 432000

2) For Capitalisation of Super Profit :

Capitalisation of Super Profit = Super Profit x 100 / Normal rate of return

Capitalisation of Super Profit = 144000 x 100/10

= 1440000

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Answer 2

Answer:

The required answers:

(i) $432000$

(ii) $1440000$

Explanation:

Assessment of Goodwill:

Average Profit = $800000$

Capital employed = Total Assets - External Liabilities

Capital employed = $800000-1440000$

$=6560000$

Normal Profit = Capital employed x Normal rate of return

Normal Profit  $=6560000$ × $\frac{10}{100}$

$=656000$

(i) For Calculation of Super Profit :

Super Profit = Average Profit - Normal Profit

Super Profit  $=800000-656000$

$=144000$

Value of Goodwill = Super Profit x No of the year purchased

Value of Goodwill  $=144000$ × $3$

$=432000$

(ii) For Capitalisation of Super Profit :

Capitalization of Super Profit = Super Profit x 100 / Normal rate of return

Capitalization of Super Profit = $144000$ × $\frac{10}{100}$

= $1440000$

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