From the following information calculate the value of goodwill by super profits method (Simple and
Weighted):
6) Average capital employed in the business is 3,60,000.
(ii) Net trading profits of the firm for the past three years were 64,560; 7 54,420 and 7 67,500.
iii) Rate of interest expected from capital having regard to the risk involved is 12 percent p.a.
iv) Fair remuneration to the partners for their service 7,200 per annum, not charged to P.& L.
Account so far.
(v) Assume goodwill at 3 years' purchase of super profit.
Answers
Answer:
goodwill by simple = 14,35,281
Explanation:
total profit = 64,560+7,54,420+7,67,500= 15,86,480
average profit= 15,86,480÷3= 5,28,827
actual average profit= 5,28,827-7,200
= 5,21,627
normal profit= 3,60,000×12 ÷ 100
=43,200
super profit = actual average profit- normal profit
= 5,21,627-43,200
= 4,78,427
Goodwill = super profit × 3
= 4,78,427 × 3
=14,35,281
Concept:
Goodwill is calculated using the super profit method.
The difference between the estimated future profit and the normal profit is the super profit. It is a method of calculating the business's extra profits.
The value of super profits is multiplied by a specific number to calculate goodwill (that number being the number of years of purchase).
Given:
profit Y1 =64650
Y2= 754420
Y3 =767500
Capital Employed = 360000
ROI = 12%
Remuneration to partners = 7200
Find:
Goodwill based on three years of purchase of the average super profits for the last four years.
Solution:
Average profits = (64650 + 754420 + 767500) / 3 - 7200
Average Profits = 528857 - 7200
Average Profits = 521657
Normal Profits = Capital Employed x ROI
Normal Profits =360000 x 12%
Normal Profits = 43200
Super profits = Average Profits - Normal Profits
Super Profits = 521657 - 43200
Super Profits = 478457
Goodwill = super profit x 3 years
Goodwill = 478457 x 3
Goodwill = 1435371
Hence, Goodwill based on three years of purchase of the average super profits for the last four years is 1435371.
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