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.




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