(Super Profit Method).
A firm earned net profits during the last three years as:
`{:("Years",I,II,III),("Profits(Rs.)","18,000","20,000","22,000"):}`
The capital investment of the firm is Rs. 60,000. Normal return on the capital is `10%`. Calculate value of goodwill on the basis of three years' purchase of the average super profit for the last three years.
Answers
Answer:
Explanation:
AVERAGE PROFIT=Rs.20,000
NORMAL PROFIT=60,000*10/100
Rs.6000
SUPER PROFIT= AVERAGE PROFIT-NORMAL PROFIT
SUPER PROFIT= 20,000-6000=Rs.14,000
GOODWILL= SUPER PROFIT*NO OF YEARS PURCHASED
GOODWILL = 14,000*3=Rs.42,000
Explanation:
Solution :
A firm earned net profits during the last three years as:
Years ----------- Profits (Rs.)
I ------------------ 18,000
Ii ------------------- 20,000
III ------------------ 22,000
• Average Profit = Total Profit/Number of years
= 18,000 + 20,000 + 22,000/3
= 60,000/3
= 20,000
Average Profit = 20,000
• Normal Profit = Capital employed x Normal rate of return
= 60,000 × (10/100)
= 6,000
Normal Profit = 6,000
• Super Profit = Average profit - Normal profit
= 20,000 - 6,000
= 14,000
Super Profit = 14,000
★ Goodwill = Super Profit x No. of years purchase
= 14,000 × 3
= 42,000
Goodwill = Rs. 42,000
Therefore, Goodwill = Rs. 42,000.