From the following calculate goodwill of M/a Sharma &Gupta: (4) 1. At the three year’s purchase of average profit . 2. At the three year’s purchase of super profit Information 1. Average capital employed = 10,00,000 2. Net profit of past three years 2019 1,60,000, 2020 --- 1,40,000, 2021 ---- 2,70,000 3. Normal rate of return is 11%
Answers
Given data:
- Capital employed = Rs 10,00,000.
- The net profit for the last three years are Rs 1,60,000 [2019], Rs 1,40,000 [2020] and Rs 2,70,000 [2021].
- The normal rate of return [NRR] is 11%.
To find:
- The goodwill at 3 years' purchase of average profit.
- The goodwill at 3 years' purchase of super profit.
Answer:
1. The Goodwill at 3 Years' Purchase of Average Profit.
Average profit = Total profit ÷ Number of years
Average profit = (Rs 1,60,000 + Rs 1,40,000 + Rs 2,70,000) ÷ 3
Average profit = Rs 1,90,000
Goodwill = Average profit × Number of years' purchase
Goodwill = Rs 1,90,000 × 3
Goodwill = Rs 5,70,000
2. The Goodwill at 3 Years' Purchase of Super Profit.
Super profit = Average profit - Normal profit
We have the average profit, i.e., Rs 1,90,000.
Normal profit = Capital employed × NRR
Normal profit = (Rs 10,00,000 × 11) ÷ 100
Normal profit = Rs 1,10,000
Super profit = Rs 1,90,000 - Rs 1,10,000
Super profit = Rs 80,000
Goodwill = Super profit × Number of years' purchase
Goodwill = Rs 80,000 × 3
Goodwill = Rs 2,40,000
Therefore, the goodwill at 3 years' purchase of average profit and super profit is Rs 5,70,000 and Rs 2,40,000 respectively.