Question

Distinguish between average profit and super profit method of goodwill

Answer 1

Hi friend here is your answer

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Super Profits Method

Super profit is the excess of average profits over normal profits. Under this method, goodwill is calculated on the basis of super profits. Normal rate of return on the capital employed is compared with the actual average profits to find out the super profits. For calculating goodwill, super profits are multiplied by the number of years of purchase.

For calculating goodwill
Normal profits = Capital employed x Normal rate of return / 100
Super profits = Actual profits - Normal profits
Goodwill = Super profits x No. of years of purchase
Note: Capital employed can be calculated by any of the following ways:
• Total capital of partnere +Reserves
• Fixed assets + Current assets - outside liabilities

Illustration 3

The profits and losses for the previous years are - 2010: Profit ₹ 20,000, 2011: Loss ₹ 34,000, 2012 : Profit ₹ 1,00,000, 2013: Profit ₹ 1,50,000. The average capital employed in the business is ₹ 4,00,000, and the rate of interest expected from capital invested is 10%. The remuneration of partners is estimated to be ₹ 12,000 p.a. Calculate the value of goodwill on the basis of 2 years’ purchases of super profits based on the average of 3 years.

Solution:

(a) Total profit for 3 years = ₹ (34,000) + ₹ 1,00,000 + ₹ 1,50,000 = ₹ 2,16,000

(b) Average profits before remuneration

(c) Average profit after remuneration = ₹ 72,000 – 12,000 = ₹ 60,000.

(d) Normal profit = Capital employed x normal rate of return = ₹ 4,00,000 x 10/100 = ₹ 40,000

(e) Super profit = Average profit – Normal profit = ₹ 60,000 - ₹ 40,000 = ₹ 20,000

(f) Goodwill = Super profit x No. of years of purchase = ₹ 20,000 x 2 = ₹ 40,000

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