A Business Has Earned Average Profit of ₹ 4,00,000 During the Last Few Years and the Normal Rate of Return in Similar Business is 10% - Goodwill
A business has earned average profit of ₹ 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of
A business has earned average profit of ₹ 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method; and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit. Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
Capital Employed = Total Assets - External liabilities
= Rs. (40,00,000 - 7,20,000)
= Rs. 32,80,000.
Normal Profit = Capital Employed x `"Normal Rate of Return"/"100"`
= Rs. 32,80,000 x `"10"/"100"`
= Rs. 3,28,000.
Average Profits = 4,00,000.
Super Profits = Average Profit - Normal Profit
= Rs. (4,00,000 - 3,28,000)
= Rs. 7,20,000.
(i) Capitalisation of Super Profit Method
= Rs. (72,000 x `"10"/"100"`)
= Rs. 7,20,000.
(ii) Super Profit Method
= Rs. 72,000 x 3
= Rs. 2,16,000.
(i) Capitalisation of Super Profit Method; and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit. Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
Capital Employed = Total Assets - External liabilities
= Rs. (40,00,000 - 7,20,000)
= Rs. 32,80,000.
Normal Profit = Capital Employed x `"Normal Rate of Return"/"100"`
= Rs. 32,80,000 x `"10"/"100"`
= Rs. 3,28,000.
Average Profits = 4,00,000.
Super Profits = Average Profit - Normal Profit
= Rs. (4,00,000 - 3,28,000)
= Rs. 7,20,000.
(i) Capitalisation of Super Profit Method
= Rs. (72,000 x `"10"/"100"`)
= Rs. 7,20,000.
(ii) Super Profit Method
= Rs. 72,000 x 3
= Rs. 2,16,000.
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