Question

A firm earns profit of ₹ 5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsiders liabilities as on the date of goodwill are ₹ 55,00,000 and ₹ 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.

Answer 1

Solution:

(i) Calculation of goodwill by capitalisation of super profit method

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

Goodwill = 90,000 x$\frac{100}{10}$  = 9,00 ,000  

Capital Employed = Assets - External Liabilities

                              = 55, 00, 000 - 14, 00, 000 = 41, 00, 000  

Normal Profit = Capital Employed x Normal Rate of Return  

                     = 41,00, 000 x $\frac{10}{100}$  

                     =4, 10,000

Profit of the firm= 5, 00, 000  

Super Profit = Actual profit - Normal Profit

                    = 5100, 000 - 4,10, 000 = 90, 000

(ii) Calculation of Goodwill by capitalisation of average profits method  

Goodwill = Capitalised Value of Profit - Actual Capital Employed Goodwill

               = 5,00,000* -41, 00, 000 = 9, 00, 000  

Capitalised Value of Profit = Actual Profit x  $\frac{100}{Normal Rate of Return }$

                                      = 5, 00, 000 x $\frac{100}{10}$

                                      = 50, 00, 000  

Capital Employed** = Assets - External Liabilities

                               = 55, 00,000 - 14, 00, 000 = 41, 00, 000  

Answer 2

Explanation:

step wise explanation of this question