A Business Has Earned Average Profit of ₹ 4,00,000 During the Last Few Years (i) Capitalisation of Super Profit Method, and (ii) Super Profit Method if the 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 goodwill by:
(i) Capitalisation of Super Profit Method, and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profits.Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
(i)Goodwill by Capitalisation of Super profit
= Rs. 32,80,000 `\times` `"10"/100`
= Rs. 3,28,000
Super Profit = Actual Profit – Normal Profit
= Rs. (4,00,000 – 3,28,000)
= Rs 72,000
Average Profit – Rs 4,00,000
Normal Rate of Return – 10%
Goodwill = 72,000 x `"100"/10`
= Rs. 7,20,000.
= Rs. (72,000 `\times` 3)
= Rs. 2,16,000
Goodwill is 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 profits.Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
(i)Goodwill by Capitalisation of Super profit
Goodwill = Super Profits `\times` `"100"/"Normal Rate of Return"`
Capital Employed = Assets – External Liabilities
Capital Employed = Assets – External Liabilities
= Rs. (40,00,000 – 7,20,000)
= Rs. 32,80,000
Normal Profit = Capital Employed `\times` `"Normal Rate of Return"/100`
Normal Profit = Capital Employed `\times` `"Normal Rate of Return"/100`
= Rs. 32,80,000 `\times` `"10"/100`
= Rs. 3,28,000
Super Profit = Actual Profit – Normal Profit
= Rs. (4,00,000 – 3,28,000)
= Rs 72,000
Average Profit – Rs 4,00,000
Normal Rate of Return – 10%
Goodwill = 72,000 x `"100"/10`
= Rs. 7,20,000.
(ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits
Goodwill = Super Profits `\times` Number of Years of Purchase
Goodwill = Super Profits `\times` Number of Years of Purchase
= Rs. (72,000 `\times` 3)
= Rs. 2,16,000
Goodwill is Rs. 2,16,000.
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