a firn earns rs 66000 as its annual profit the rate of normal profit being 10% The assets of the firm amount to rs 700000 and liabilii to rs 200000 find out the value of G.W capitalization method
Answers
Answer:
(i) 3 Years' purchase of Average Profit method:
Step 1: Calculation of Average Profit:
Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3
= 80000
Step 2: Calculation of Goodwill:
Goodwill= 80000 * 3
= 240000
(ii) 3 Years' purchase of Super Profit method:
Step 1: Calculation of Capital Employed:
Capital Employed= total assets- external liabilities
= 700000-100000
= 600000
Step 2: Calculation of Normal Profit:
Normal Profit= 600000* [10/100]
= 60000
Step 3: Calculation of Average Profit:
Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3
= 80000
Step 4: Calculation of Super Profit:
Super Profit= 80000-60000
= 20000
Step 5: Calculation of goodwill:
Goodwill= 20000 * 3
= 60000
(iii) Capitalisation of Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= total assets- external liabilities
= 700000-100000
= 600000
Step 2: Calculation of Normal Profit:
Normal Profit= 600000* [10/100]
= 60000
Step 3: Calculation of Average Profit:
Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3
= 80000
Step 4: Calculation of Super Profit:
Super Profit= 80000-60000
= 20000
Step 5: Calculation of goodwill:
Goodwill= Super Profit * [100/Normal Rate of return]
= 20000*[100/10]
= 200000
(iv) Capitalisation of Average Profit method:
Step 1: Calculation of Average Profit:
Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3
= 80000
Step 2: Calculation of capitalised value of profit:
Capitalised value of profit= 80000*[100/10]
= 800000
Step 3: Calculation of Capital Employed:
Capital Employed= total assets- external liabilities
= 700000-100000
= 600000
Step 4: Calculation of goodwill:
Goodwill= 800000-600000
= 200000
Explanation:
Solution :
★ Goodwill = Capitalised Value of Profit - Actual Capital Employed
• Actual Capital Employed = Assets - Liabilities
= 7,00,000 - 2,00,000
= 5,00,000
Actual Capital Employed = Rs. 5,00,000
• Capitalised Value of Profit = Annual Profit × (100/Rate of Return)
= 66,000 × (100/10)
= 6,60,000
Capitalised Value of Profit = Rs. 6,60,000
★ Goodwill = Capitalised Value of Profit - Actual Capital Employed
= 6,60,000 - 5,00,000
= 1,60,000
Goodwill = Rs. 1,60,000
Therefore, the value of Goodwill by capitalization method = Rs. 1,60,000