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Question

# 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 = 3280000Step 2: Calculation of Normal Profit:Normal Profit= 3280000 * [10/100] = 328000Step 3: Calculation of Average Profit:Average Profit= 400000Step 4: Calculation of Super Profit:Super Profit= 400000- 328000 = 72000Step 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 = 3280000Step 2: Calculation of Normal Profit:Normal Profit= 3280000 * [10/100] = 328000Step 3: Calculation of Average Profit:Average Profit= 400000Step 4: Calculation of Super Profit:Super Profit= 400000- 328000 = 72000Step 5: Calculation of Goodwill:Goodwill= Super Profit * Number of years' of purchase = 72000 * 3 = 216000

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