Question

A business has earned average profit of ₹ 4,00,000 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 profits.
Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.

Answer 1

Solution:

Average Profit = Rs.4,00,00

Normal Rate of Return = 10%

(i) Goodwill by Capitalisation of super profit Capital Employed

                   = Assets - External Liabilities

                  = 40,00,000 - 7,20,000 = Rs.32,80,000

Normal Profit = Capital Employed x Normal Rate of Return  

                    = 32, 80, 000 x $\frac{10}{100}$

                    = 3,28,000

Super Profit = Actual Profit - Normal Profit

                    = 4,00.000 3,28,000 = Rs.72,000  

Goodwill = Super Profits x  $\frac{100}{Normal Rate of Return }$

Goodwill = 72, 000 x $\frac{100}{10}$

= Rs.7,20,000  

(ii) Super Profit Method if the goodwill is valued at 3 years purchase of super profits Goodwill = Super Profits x Number of Years of Purchase

                                    = 72, 000 x 3 = 2,16,000

Therefore, Goodwill is valued at Rs.2,16,000  

Answer 2

Answer:

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