Question

TAUS:
ch
Super Profit Method :
Q. 8. A partnership firm earned net profits during the last four years as follows:
Year
1
2
3
4
56,000
64,000
60,000
62,000
The capital investment in the firm throughout the above mentioned period has
been 33,00,000. Having regard to the risk involved, 15% is considered to be a fair
return on the capital.
Calculate the value of goodwill on the basis of 3 years' purchase of average super
profits earned during the above-mentioned four years.
[Ans. 46,500.]​

Answer 1

ANSWER :

• ❖ If partnership firm earned net profits during the last four years are :- Profit for the first year is Rs. 56,000; Profit for the second year is Rs. 64,000; Profit for the third year is Rs. 60,000; Profit for the fourth year is Rs. 62,000 and the capital investment in the firm throughout the above mentioned period has been Rs. 3,00,000 and aving regard to the risk involved, 15% is considered to be a fair return on the capital; then the value of Goodwill on the basis of 3 years' purchase of average super profits earned during the above-mentioned four years will be Rs. 46,500.

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SOLUTION :

❒ Given :-

• Capital Employed throughout the year = Rs. 3,00,000

• Profit for the first year = Rs. 56,000

• Profit for the second year = Rs. 64,000

• Profit for the third year = Rs. 60,000

• Profit for the fourth year = Rs. 62,000

• Normal Rate of Return = 15%

• Number of years purchase = 3 years

❒ To Calculate :-

• Value of Goodwill based on Super Profit of the firm = ?

____________________________________________

❒ Step 1 : Calculation of Average Profit :-

Here,

• Profit for the first year = Rs. 56,000

• Profit for the second year = Rs. 64,000

• Profit for the third year = Rs. 60,000

• Profit for the fourth year = Rs. 62,000

• No. of years = 4 years

We know that,

• $\dag \: \: \underline{ \boxed{ \sf{ \: Average \: \: Profit = \dfrac{Sum \: \: of \: \: the \: \: profits \: \: of \: \: given \: \: years }{No. \: \: of \: \: years} \: }}}$

Using this formula we get,

• $\bigstar \: \: \sf{ \: Average \: \: Profit = \dfrac{Sum \: \: of \: \: the \: \: profits \: \: of \: \: given \: \: years }{No. \: \: of \: \: years} \: }$

➜ Average Profit = $\sf{\dfrac{Rs. \: 56,000 + Rs. \: 64,000 + Rs. \: 60,000 + Rs. \: 62,000}{4}}$

➜ Average Profit = $\sf{\dfrac{Rs. 2,42,000}{4}}$

➜ Average Profit = Rs. 60,500

• So, the Average Profit of the firm = Rs. 60,500.

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❒ Step 2 : Calculation of Normal Profit :-

Here,

• Capital Employed = Rs. 3,00,000

• Normal Rate of Return = 15%

We know that,

• $\dag \: \: \underline{ \boxed{\sf{\: Normal \: \: Profit = \dfrac{Capital \: \: Employed \times Normal \: \: Rate \: \: of \: \: Return}{100} \: }}}$

Using this formula we get,

• $\bigstar \: \: \sf{\: Normal \: \: Profit = \dfrac{Capital \: \: Employed \times Normal \: \: Rate \: \: of \: \: Return}{100} \: }$

➜ Normal Profit = $\sf{\dfrac{Rs. \: 3,00,000 \times 15}{100}}$

➜ Normal Profit = $\sf{\dfrac{Rs. \: 45,00,000}{100}}$

➜ Normal Profit = Rs. 45,000

• So, the Normal Profit of the firm = Rs. 45,000.

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❒ Step 3 : Calculation of Super Profit :-

Here,

• Average Profit of the firm = Rs. 60,500

• Normal Profit of the firm = Rs. 45,000

We know that,

• $\dag \: \: \underline{ \boxed{ \sf{ \: Super \: \: Profit = Average \: \: Profit - Normal \: \: Profit \: }}}$

Using this formula we get,

• $\bigstar \: \: \sf{ \: Super \: \: Profit = Average \: \: Profit - Normal \: \: Profit \: }$

➜ Super Profit = Rs. 60,500 - Rs. 45,000

➜ Super Profit = Rs. 15,500

• So, the Super Profit of the firm = Rs. 15,500.

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❒ Step 4 : Calculation of Value of Goodwill :-

Here,

• Super Profit of the firm = Rs. 15,500

• No. of years purchase = 3 years

∴ Value of Goodwill = Super Profit of the firm × No. of years purchase

➨ Value of Goodwill = Rs. 15,500 × 3

➨ Value of Goodwill = Rs. 46,500

• Hence, the Value of Goodwill of the firm is Rs. 46,500.