Question

A business earned average profit of Rs.1,00,000 during the last few years. The normal rate of return in similar type of business is 10%.
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Rest Question in pic ​

Answer 1

Information provided with us:

• Profit is of Rs.1,00,000
• Normal rate of return is 10%
• Assets of that business is Rs 10,00,000
• External liabilities was Rs.1,80,000
• Good will is valued at 2 1/2 years that is 2.5 years

What we have to calculate:

• We have to calculate and find out the goodwill

We know that,

• Capital = Assets - External liabilities
• Normal profit = Capital employed × Normal rate of return
• Goodwill = Super Profit × Purchase years
• Super profit = Average profit - Normal Profit

Starting solving:

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Finding out capital employed:-

Here we have,

• Assets = 10,00,000
• External liabilities = 1,80,000

Substituting the values,

=> Capital employed = 1000000 - 180000

=> Capital employed = 820000

Finding out normal profit:-

Here we have,

• Capital employed = 820000
• Normal rate of return = 10%

Substituting the values,

=> normal profit = 820000 × 10%

=> normal profit = 820000 × 10/100

=> normal profit = 820000 × 1/10

=> normal profit = 82000 × 1

=> normal profit = 82000

Finding out super profit:-

Here we have,

• Average profit = Rs.1,00,000
• Normal profit = 82000

Substituting the values,

=> super profit = 100000 - 82000

=> super profit = 18000

Finding out goodwill:-

Here we have,

• Super profit = 18000
• Purchase year = 2.5

Substituting the values,

=> goodwill = 18000 × 2.5

=> goodwill = 18000 × 25/10

=> goodwill = 1800 × 25

=> goodwill = 45000

Conclusion:

• Value of goodwill is Rs.45000

Answer 2

Question:-

A business earned average profit of Rs.1,00,000 during the last few years. The normal rate of return in similar type of business is 10%.The assets of the business were Rs. 10,00,000 and external liabilities was Rs. 1,80,000.Calculate the value of goodwill of the firm by super profit method,if the goodwill is valued at 2. 1/2 years purchase of super profits.

Given:-

• Profit of Rs. 10,00,000.
• Normal rate of return 10%.
• Assests of the business is Rs. 10,00,000.
• External liabilities was Rs.1,80,000.
• Goodwill is valued at 2 1/2 years purchase of super profit.

To Find:-

• To calculate and find out the goodwill.

Solution:-

• Super profit = Average profit — Normal profit.

• Average profit = Rs.1,00,000.

• Normal profit = Capital Employed × Normal rate of return / 100.

• Capital employed = Assets — Liabilities.

Capital Employed = Assets – Liabilities.

= 10,00,000 — 1,80,000

= 8,20,000

Normal Profit = 8,20,000 × 10/ 100

= Rs.82,000.

Super profit = 1,00,000 — 82,000

= Rs.18,000.

Using reopen profit method.

• Goodwill = Super profit × No.of years purchase.

= 18,000 × 2 1/2

= 18,000 × 5/2

= 9000 × 2

= Rs.45,000.

Answer:-

Hence,Goodwill = Rs.45,000.