Question

Average profit is 3 5,00,000. Capital employed is 2 40,00,000. Normal rate of return is 8%. The value
of goodwill on the basis of capitalisation of super profit is:
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Answer 1

Answer:

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Explanation:

(i) Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 300000

Step 2: Calculation of Normal Profit:

Normal Profit= 300000 * [10/100]

= 30000

Step 3: Calculation of Average Profit:

Average Profit= 50000

Step 4: Calculation of Super Profit:

Super Profit= 50000-30000

= 20000

Step 5: Calculation of Goodwill:

Goodwill= Super Profit * Number of years' of purchase

= 20000 * 3

= 60000

(ii) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 300000

Step 2: Calculation of Normal Profit:

Normal Profit= 300000 * [10/100]

= 30000

Step 3: Calculation of Average Profit:

Average Profit= 50000

Step 4: Calculation of Super Profit:

Super Profit= 50000-30000

= 20000

Step 5: Calculation of Goodwill:

Goodwill= Super profit* [100/Normal Rate of return]

= 20000 * [100/10]

= 200000

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