Question

how we can calculate the goodwill

Answer 1

In order to use the the capitalization method, you must know how to calculatethe capitalized value of profits. In order tofind the capitalized value of profits, youmust first multiply the average or super profit by 100 (either one works). The total must then be divided by the normal rate of return.Sep 8, 2017

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Answer 2

There are three methods of calculation  of goodwill of the firm;

1. Average Profits Method-Under this method goodwill is calculated on the basis of the average of some agreed number of past years. The average is then multiplied by the agreed number of years. This is the simplest and the most commonly used method of the valuation of goodwill.

Goodwill = Average Profits X Number of years of Purchase

2. Super Profits Method -Super Profits are the profits earned above the normal profits. Under this method Goodwill is calculated on the basis of Super Profits i.e. the excess of actual profits over the average profits

Steps for calculating Goodwill under this method are given below:

i) Normal Profits = Capital Invested X Normal rate of return/100

ii) Super Profits = Actual Profits – Normal Profits

iii) Goodwill = Super Profits x No. of years purchase

3. Capitalisation Method -

(i) Capitalisation of Average Profits Method:

Under this method we calculate the average profits and then assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is called capitalised value of average profits. The formula is:-

Capitalised Value of Average Profits = Average Profits X (100 / Normal Rate of Return)

Capital Employed = Assets – Liabilities

Goodwill = Capitalised Value of Average Profits – Capital Employed

(ii)Capitalisation of Super Profits:

Under this method first of all we calculate the Super Profits and then calculate the capital needed for earning such super profits on the basis of normal rate of return. This Capital is the value of our Goodwill . The formula is:-

Goddwill = Super Profits X (100/ Normal Rate of Return)

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