Question

The following information is given:

(a) Capital employed Rs.1,50,000

(b) Normal rate of profit 10%

(c) Present value of annuity of Re.1 for 5 years at 10%

(d) Net profit

I year– Rs.14,000; II year –Rs. 15,400 ; III year Rs.–16,900;

IV year – Rs. 17,400 ; V year –Rs.17,900

The profit included non-recurring profit on an average

basis of Rs.1,000 out of which it was deemed that even

recurring profits has a tendency of appearing @ Rs.600 per

annum. You are required to calculate good will.

(i) As per annuity method.

(ii) As per five year’s purchase of super ​

Answer 1

Answer:

no problem

Explanation:

answer problem l

Answer 2

Answer:

Goodwill as per annuity method = Rs. 3,4837.5

Goodwill as per super method = Rs. 4,600

Explanation:

As per super profit:

$Super Profit = Average Profit - Normal Profit$

$Normal Profit = Capital Employed * \frac{R}{100}\\ Substitute the value\\Normal Profit = Rs. 1,50,000 * \frac{10}{100} \\= Rs. 15,000$

$Average profit = \frac{Total of profit}{ no. of years} \\= \frac{14,000+15,400+16,900+17,400+17,900}{5}\\= 16,320\\Adjusted Average Profit \\= 16,320 - 400 (1000-600) (Non - recurring profit)\\= Rs. 15,920$

$Super Profit = Average profit - Normal profit \\= Rs. 15,920 - Rs. 15,000\\= Rs. 920$

$Goodwill = Super profit * no. of purchase years\\= 920 * 5\\= Rs. 4,600$

As per Annuity method

$Q = \frac{1-(1+\frac{r}{n} )^{2} }{\frac{r}{100} }\\ where, \\Q = the present value of an annuity \\\\R = Rate of rate interest per annum\\N= the number of years$

As per formula and value given in questions we substitute the value

$Q = \frac{1 - (1 + \frac{10}{5} )^{2}}{\frac{10}{100} }\\ Q = 3.7908$

$Goodwill = Super profit * annuity value \\= 920*3.7908\\= Rs. 3,487.5$

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