A firm earned average profit during the last few years is 40,000 and the normal
rate of return in similar business is 10%. The total assets is 3,60,000 and outside
liabilities is 50,000. Calculate the value of goodwill with the help of Capitalisation
of Average profit method.
A firm earned average profit during the last few years is 40,000 and the normal
rate of return in similar business is 10%. The total assets is 3,60,000 and outside
liabilities is 50,000. Calculate the value of goodwill with the help of Capitalisation
of Average profit method.
Answers
Answer:
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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: