A business has earned average profit of Rs. 7,50,000 during the last few years and average capital employed during the same period amounted Rs.60,00,000 normal rate of return in similar business is 10%. Assets of the business were Rs. 82,00,000 and its external liabilities Rs. 15,00,000. Find value of goodwill by: (i) Capitalisation of Average Profit Method; (ii) Capitalisation of Super Profit Method; (iii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.
Answers
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
Explanation:
A business has earned average profit of Rs. 7,50,000 during the last few years and average capital employed during the same period amounted Rs.60,00,000 normal rate of return in similar business is 10%. Assets of the business were Rs. 82,00,000 and its external liabilities Rs. 15,00,000. Find value of goodwill by: (i) Capitalisation of Average Profit Method; (ii) Capitalisation of Super Profit Method; (iii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.