Question

Average profit of a firm during the last few years is ? 1,50,000, in similar business, the normal rate ofretum is 10% of the capital employed. Calculate the value of goodwill by capitalisation of super profit method if super profits of the firm are 50,000

Answer 1

Answer:

(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

Answer 2

Explanation:

Given :

• Average profit of a firm = 1,50,000
• The normal rate of retum is 10%
• Super Profit = 50,000
• The value of goodwill (Capitalisation of super profit method) = ???

Capitalisation of super profit method :

• The value of goodwill :

Super profits x (100/ Normal Rate of Return) 

=> 50,000 × 100/10

=> 5,00,000

The value of goodwill = 5,00,000

Hence, The value of goodwill = 5,00,000