Q.17.A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method

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Q.17.A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%?

SOLUTION

Capitalisation of Super Profit Method 

Goodwill=Super Profit Normal rate of Returns×100 

Super Profit = Average Profit − Normal Profit

Average Profit = Rs 1,00,000 

Normal Profit=Capital Employed×Normal Rate of Return 100  

Capital Employed = Assets − Liabilities

= 10,00,000 −1,80,000 = Rs 8,20,000 

Normal Profit= 8,20,000×10100=Rs 82,000 

Super Profit = 1,00,000 −82,000 = Rs 18,000 

∴ Goodwill=18,000010×100=Rs 1,80,000   

 Super Profit Method

Goodwill = Super Profit × No. of Years of Purchase

= 18,000 × 3 = Rs 54,000

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