Question

Average profit of the firm is 6,00,000. Total tangible assets in the firm are 28,00,000 and outside liabilities are 8,00,000. In the same type of business, normal rate of return is 20% of the capital employed. Calculate the value of goodwill by capitalisation of super profit method. *​

Answer 1

Answer:

(i) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 5500000- 1400000

= 4100000

Step 2: Calculation of Normal Profit:

Normal Profit= 4100000 * [10/100]

= 410000

Step 3: Calculation of Average Profit:

Average Profit= 500000

Step 4: Calculation of Super Profit:

Super Profit= 500000- 410000

= 90000

Step 5: Calculation of Goodwill:

Goodwill= 90000 * [100/10]

= 900000

(ii) Capitalisation of Average Profit Method:

Step 1: Calculation of Capitalised value of Profit:

Capitalised value of Profit= Profit * [100/ Normal Rate of return]

= 500000 * [100/10]

= 5000000

Step 2: Calculation of Capital Employed:

Capital Employed= 5500000- 1400000

= 4100000

Step 3: Calculation of Goodwill:

Goodwill= Capitalised value of Profit- Capital Employed

= 5000000- 4100000

= 900000