Question

Q. 12. The net assets of a firm as on March 31, 2020 were 4,00,000. If the normal
rate of return is 20% and the goodwill of the firm is valued at 1,25,000 at 5 year's
purchase of super profits, find the average profits of the firm.

Answer 1

Answer:

super profit = 1,25,000/5= 25,000

normal profit = 4,00,000×20/100= 80,000

average profit = 80,000-25,000 = 55,000

Answer 2

Answer:

1,05,000

Explanation:

As we know,

The formula of goodwill is

• goodwill = super profit x number of year of purchase
• Also, Super profit = goodwill / number of year of purchase

Now,

Super profit given 125000

number of year of purchase = 5

Rate = 20 %

• Super profit = goodwill / number of year of purchase

125000/ 5 = 25000

• Normal profit = net asset x rate / 100

= 4,00,000 x 20 / 100

= 8,00,000

• Super profit = average profit - normal profit

now average profit = Super profit + normal profit

• average profit  = 8,00,000 + 25,000
• = 1,05,000/-

Hence,  the average profits of the firm is 1,05,000/.

Methods of valuation of goodwill :

1. Average profit method
2. Weighted average profit method
3. Super profit method
4. Capitalization method
5. Capitalisation of average profit method
6. capitalisation of super profit method.

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