The total assets of a firm were Rs. 5,00,000 and outsiders Liabilities were Rs. 80,000. Actual profits earned by the firm were Rs. 80,000. Calculate the total capitalized value of the business if the normal rate is 10%.
Answers
Explanation:
ANSWER
(i) Capitalisation of Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= 5500000- 1400000
= 4100000
Step 2: Calculation of Normal Profit:
Normal Profit= 4100000 * [10/100]
= 410000
Step 3: Calculation of Average Profit:
Average Profit= 500000
Step 4: Calculation of Super Profit:
Super Profit= 500000- 410000
= 90000
Step 5: Calculation of Goodwill:
Goodwill= 90000 * [100/10]
= 900000
(ii) Capitalisation of Average Profit Method:
Step 1: Calculation of Capitalised value of Profit:
Capitalised value of Profit= Profit * [100/ Normal Rate of return]
= 500000 * [100/10]
= 5000000
Step 2: Calculation of Capital Employed:
Capital Employed= 5500000- 1400000
= 4100000
Step 3: Calculation of Goodwill:
Goodwill= Capitalised value of Profit- Capital Employed
= 5000000- 4100000
= 900000