Question

A business has earned average profits of Rs 1,00,000 during the last few years and the normal rate of return in similar business is 10%. Find out the value of goodwill by :

(i) Capitalisation of super profit method.

(ii) Super profit method if the good will is valued at 3 years' purchase of super profit.

The assets of the business were Rs 10,00,000 and its external liabilities Rs 1,80,000.

Answer 1

Capital Employed = Assets - Liabilities

= Rs 10,00,000 - Rs 1,80,000 = Rs 8,20,000

Net Profit = Capital employed $\times \frac{\text{Normal rate of return}}{100}$

= $Rs8,20,000\times \frac{10}{100}=Rs82,000$

Super Profit = Average profits - Normal profits

= Rs 1,00,000 - Rs 82,000 = Rs 18,000

(i) Capitalisation of Super Profit Method :

Goodwill = $\frac{\text{Super profits}\times 100}{\text{Normal rate of return}}$

= $\frac{18,000\times 100}{10}=Rs1,80,000$

(ii) Super Profit Method :

Goodwill = Super profit $\times$ Number of year's purchase

= $Rs18,000\times 3=Rs54,000$