Question

A firm's profit during 2013, 2014,2015,2016 were rs. 16000,rs.20000,rs. 24000and rs.32000 respectively. The firm has capital investment of rs. 100000 .A fair rate of return on investment is 18% p.a compute goodwill based on three years purchase of the average super profits for the last four years

Answer 1

Answer:

super profit = Normal profit - Actual profit

normal profit is taken as average profit

average profit = 16000+20000+24000+32000

2

= 23000

Normal profit = 100000*18%= 18000

so,

super profit = 23000-18000

=5000 (Ans)

Answer 2

Concept:

Super profit method of calculating Goodwill-

• The super profit is the difference between the estimated future profit and the normal profit. It is a method of calculating the extra profits earned by the business.
• Goodwill is calculated by multiplying the value of super profits by a specific number (that number being the number of years of purchase).

Given:

• profit      2013 = 16000

                       2014 = 20000

                       2015 = 24000

                       2016 = 32000

• Capital Employed = 100000
• ROI = 18%

Find:

Goodwill based on three years of purchase of the average super profits for the last four years.

Solution:

Average profits = (16000 + 20000 + 24000 + 32000) / 4

Average Profits = 23000

Normal Profits = Capital Employed x ROI

Normal Profits = 100000 x 18%

Normal Profits = 18000

Super profits = Average Profits - Normal Profits

Super Profits = 23000 - 18000

Super Profits = 5000

Goodwill = super profit x 3 years

Goodwill = 5000 x 3

Goodwill = 15000

Hence, Goodwill based on three years of purchase of the average super profits for the last four years is 15000.

#SPJ2