Question

Give the formula for calculation of goodwill by "Capitalization of super profit method​

Answer 1

Answer :-

Capitalisation of super profit method

• Capitalisation of super profits :-

Good will can also be ascertained by capitalising the super profit directly. Under this method there is no need to work out the capitalised value of average profits. It involves the following steps -

• Calculate capital employed of the firm, which is equal to total assets minus ( - ) outside liabilities.

• Calculate normal profit on capital employed

• Calculate average profit for past years, as specified.

• Calculate super profit by deducting normal profirs from average profits.

• Multiply the super profit by the required rate

Goodwill = Super profits × Normal rate of return/100.