A business has earned average profit of Rs. 1,00,000 during the last few years and the normal rate of return in similar business is `10%`. Find out the 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 Rs. 10,00,000 and its external liabilities Rs. 1,80,000.
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Given:
- Average profit - Rs 1,00,000
- NRR [Normal Rate of Return] - 10%
- Assets - Rs 10,00,000
- Liabilities - Rs 1,80,000
To find:
- The value of goodwill by the capitalization of super profit method.
- The value of goodwill if it is to be valued at 3 years' purchase of the super profit.
Answer:
Capital employed = Assets - Liabilities
Capital employed = Rs 10,00,000 - Rs 1,80,000
Capital employed = Rs 8,20,000
Normal profit = Capital employed × (NRR ÷ 100)
Normal profit = Rs 8,20,000 × (10 ÷ 100)
Normal profit = Rs 82,000
Super profit = Average profit - Normal profit
Super profit = Rs 1,00,000 - Rs 82,000
Super profit = Rs 18,000
Goodwill by the capitalization of super profit method:
Goodwill = Super profit × (100 ÷ NRR)
Goodwill = Rs 18,000 × (100 ÷ 10)
Goodwill = Rs 1,80,000
Therefore, the value of goodwill by the capitalization of super profit method is Rs 1,80,000.
Goodwill on the basis of super profit:
Goodwill = Super profit × Number of years' purchase
Goodwill = Rs 18,000 × 3
Goodwill = Rs 54,000
Therefore, the value of goodwill on the basis of 3 years' purchase of the super profit is Rs 54,000.
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