Question

A firm earns ₹1,10,000. The normal rate of return is 10%. The assets of the firm amounted to ₹11,00,000 and liabilities to ₹1,00,000. Value of goodwill by capitalisation of Average Actual Profits will be

Answer 1

Answer:

ANSWER

(i) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 5500000- 1400000

= 4100000

Step 2: Calculation of Normal Profit:

Normal Profit= 4100000 * [10/100]

= 410000

Step 3: Calculation of Average Profit:

Average Profit= 500000

Step 4: Calculation of Super Profit:

Super Profit= 500000- 410000

= 90000

Step 5: Calculation of Goodwill:

Goodwill= 90000 * [100/10]

= 900000

(ii) Capitalisation of Average Profit Method:

Step 1: Calculation of Capitalised value of Profit:

Capitalised value of Profit= Profit * [100/ Normal Rate of return]

= 500000 * [100/10]

= 5000000

Step 2: Calculation of Capital Employed:

Capital Employed= 5500000- 1400000

= 4100000

Step 3: Calculation of Goodwill:

Goodwill= Capitalised value of Profit- Capital Employed

= 5000000- 4100000

= 900000

Answer 2

Answer:

Rs. 1,00,000

Explanation:

Goodwill = Capitalise Average profit - Normal capital employed

Capitalise Average profit = 1,10,000 * 100/10 = 11,00,000

Normal capital employed

= Total Assets(excluding goodwill) - outsider Liabilities

= 11,00,000 - 1,00,000 = 10,00,000

Goodwill = 11,00,000 - 10,00,00 = Rs. 1,00,000