A firm earns profit of Rs $5, 00, 000$ . Normal rate of Return in a similar type of business is $10$ . The value of total assets (excluding goodwill) and total outsider liabilities as on the date of goodwill are Rs. $55, 00, 000$ and Rs. $14, 00, 000$ respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.

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Solution

(i) Capitalisation of Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= 5500000- 1400000
= 4100000

Step 2: Calculation of Normal Profit:
Normal Profit= 4100000 * [10/100]
= 410000

Step 3: Calculation of Average Profit:
Average Profit= 500000

Step 4: Calculation of Super Profit:
Super Profit= 500000- 410000
= 90000

Step 5: Calculation of Goodwill:
Goodwill= 90000 * [100/10]
= 900000

(ii) Capitalisation of Average Profit Method:
Step 1: Calculation of Capitalised value of Profit:
Capitalised value of Profit= Profit * [100/ Normal Rate of return]
= 500000 * [100/10]
= 5000000

Step 2: Calculation of Capital Employed:
Capital Employed= 5500000- 1400000
= 4100000

Step 3: Calculation of Goodwill:
Goodwill= Capitalised value of Profit- Capital Employed
= 5000000- 4100000
= 900000

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