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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. |
| Answer» N:Average Profit = Rs.4,00,00 NORMAL Rate of RETURN = 10% (i) Goodwill by Capitalisation of super profit CAPITAL Employed = Assets - External Liabilities = 40,00,000 - 7,20,000 = Rs.32,80,000 Normal Profit = Capital Employed x Normal Rate of Return = 32, 80, 000 x = 3,28,000 Super Profit = Actual Profit - Normal Profit = 4,00.000 3,28,000 = Rs.72,000 Goodwill = Super Profits x Goodwill = 72, 000 x = Rs.7,20,000 (ii) Super Profit Method if the goodwill is valued at 3 years purchase of super profits Goodwill = Super Profits x Number of Years of Purchase = 72, 000 x 3 = 2,16,000 Therefore, Goodwill is valued at Rs.2,16,000 | |