A business has earned average profit of Rs. $4, 00, 000$ 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 Rs. $40, 00, 000$ and its external liabilities Rs. $7, 20, 000$ .

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Solution

(i) Capitalisation of Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= Assets- External Liabilities
= 4000000- 720000
= 3280000

Step 2: Calculation of Normal Profit:
Normal Profit= 3280000 * [10/100]
= 328000

Step 3: Calculation of Average Profit:
Average Profit= 400000

Step 4: Calculation of Super Profit:
Super Profit= 400000- 328000
= 72000

Step 5: Calculation of Goodwill:
Goodwill= Super Profit * [100/Normal Rate Of Return]
= 72000 * [100/10]
= 720000

(ii) Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= Assets- External Liabilities
= 4000000- 720000
= 3280000

Step 2: Calculation of Normal Profit:
Normal Profit= 3280000 * [10/100]
= 328000

Step 3: Calculation of Average Profit:
Average Profit= 400000

Step 4: Calculation of Super Profit:
Super Profit= 400000- 328000
= 72000

Step 5: Calculation of Goodwill:
Goodwill= Super Profit * Number of years' of purchase
= 72000 * 3
= 216000

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