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Question

# A firm earns profit of Rs5,00,000. 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 = 4100000Step 2: Calculation of Normal Profit:Normal Profit= 4100000 * [10/100] = 410000Step 3: Calculation of Average Profit:Average Profit= 500000Step 4: Calculation of Super Profit:Super Profit= 500000- 410000 = 90000Step 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] = 5000000Step 2: Calculation of Capital Employed:Capital Employed= 5500000- 1400000 = 4100000Step 3: Calculation of Goodwill:Goodwill= Capitalised value of Profit- Capital Employed = 5000000- 4100000 = 900000

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