Q5. The firm of P,Q and R, earned ₹4,00,000 average profits during the last three years. The capital employed in the business was ₹6,00,000. Normal rate of return of the industry is 8%.
Calculate the goodwill of the firm by capitalising the super profits.
Answers
Answer:
216000
Explanation:
(i) Capitalisation of Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= Assets- External Liabilities
= 4000000- 720000
= 3280000
Step 2: Calculation of Normal Profit:
Normal Profit= 3280000 * [10/100]
= 328000
Step 3: Calculation of Average Profit:
Average Profit= 400000
Step 4: Calculation of Super Profit:
Super Profit= 400000- 328000
= 72000
Step 5: Calculation of Goodwill:
Goodwill= Super Profit * [100/Normal Rate Of Return]
= 72000 * [100/10]
= 720000
(ii) Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= Assets- External Liabilities
= 4000000- 720000
= 3280000
Step 2: Calculation of Normal Profit:
Normal Profit= 3280000 * [10/100]
= 328000
Step 3: Calculation of Average Profit:
Average Profit= 400000
Step 4: Calculation of Super Profit:
Super Profit= 400000- 328000
= 72000
Step 5: Calculation of Goodwill:
Goodwill= Super Profit * Number of years' of purchase
= 72000 * 3
= 216000