Question

Compute the value of goodwill at two years
purchase of the super
profits from the following information:
Average Profits = Rs. 21,500; Capital Employed
= Rs. 2,00,000;
and Normal Rate of Return
cent.
2
10 per​

Answer 1

Explanation:

(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