Capital invested in a firm is ₹ 10,00,000. Normal rate of return being 10%. Average profits of the firm is ₹ 1,28,000 (after an abnormal loss of ₹ 8,000). Value of Goodwill at four years purchase of Super Profit will be [2] A. ₹ 72,000 B. ₹ 40,000 C. ₹ 1,44,000 D. ₹ 2,88,000
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