) A business earned on an average profit of Rs.45,000 during the last few years. The average capital employed by the firm is Rs.3,12,500 .If Goodwill of the firm is valued at Rs.40,000 at 2 years purchase of super profit, find out the normal rate of return.
Answers
Explanation:
The formula for calculating normal rate of return is ;
Goodwill = Super Profit * [100/Normal Rate Of Return]
In the given case, we have goodwill valued at 40,000 but not the value of super profit. To calculate super profit we use below formula,
Goodwill = Super Profit * Number of years' of purchase
40,000 = Super profit * 2
Super profit = 20,000
Now calculating normal rate of return
40,000 = 2,0000 * 100/Normal rate of return
Normal rate of return = 50
Answer:
(i) Capitalisation of Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= Assets- External Liabilities
= 4000000- 720000
= 3280000
Step 2: Calculation of Normal Profit:
Normal Profit= 3280000 * [10/100]
= 328000
Step 3: Calculation of Average Profit:
Average Profit= 400000
Step 4: Calculation of Super Profit:
Super Profit= 400000- 328000
= 72000
Step 5: Calculation of Goodwill:
Goodwill= Super Profit * [100/Normal Rate Of Return]
= 72000 * [100/10]
= 720000
(ii) Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= Assets- External Liabilities
= 4000000- 720000
= 3280000
Step 2: Calculation of Normal Profit:
Normal Profit= 3280000 * [10/100]
= 328000
Step 3: Calculation of Average Profit:
Average Profit= 400000
Step 4: Calculation of Super Profit:
Super Profit= 400000- 328000
= 72000
Step 5: Calculation of Goodwill:
Goodwill= Super Profit * Number of years' of purchase
= 72000 * 3
= 216000