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

Goodwill = Super Profits `\times` `"100"/"Normal Rate of Return"`

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`

= 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

= Rs. (72,000 `\times` 3) 

= Rs. 2,16,000

Goodwill is Rs. 2,16,000. 

Chapter-3 Goodwill: Nature and Valuation-TS.Grewal

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