Question

Net profit of company after the provided taxation for the past 5 years as Rs.78,no; Rs.82,no.;Rs.88,000 ;Rs.93,000 ,Rs.99,no. The capital employed India business as 8,00,no on which reasonable rate of return of 10% is expected
The value of goodwill of the business on the basic of :-
i) Average profit method
ii) super profit method for 5 years purchased
iii) annuity method taking the present value 37.
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Answer 1

Answer:

1) Average profit method:

Average profit=Total of profit during the past year/No.of years

=78000+82000+88000+93000+99000/5

=440000/5

=88000

So Goodwill=88000

2) Super profit method:

Super profit=Actual profit-Normal profit

Actual profit is average profit

Now we find Normal profit

Normal profit=Capital employed×NRR/100

(NRR stands for normal rate of return)

Capital employed=800000

NRR=10%

So,

800000×8/100

=64000

Super profit=88000-64000

=24000

Goodwill=super profit×No.of purchase year

=24000×5

= 1,20,000

3) Annuity method:

Formula of Annuity=Super profit×present value

=24000×37

=888000

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