Question

Average profit of GS & Co. is ₹ 50,000 per year. Average capital employed in the business is ₹ 3,00,000. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.

Answer 1

(i) $\begin{array}{l}\text{Goodwill}=\text{Super Profit}\times \text{No. of Years' Purchase}\\ =20\text{,000}\times 3=\text{Rs 60,000}\end{array}$

(ii) $\begin{array}{l}\text{Goodwill}=\text{Super Profit}\times \frac{\text{100}}{\text{Normal Rate of Return}}\\ =2\text{0,000}\times \frac{100}{10}=\text{Rs 2,00,000}\end{array}$

Working Notes:

WN1: Calculation of Super Profits

$\begin{array}{l}\text{Average Profit}=\frac{\text{Total Profits for past given years}}{\text{No. of Years}}\\ =\text{Rs 50,000}\\ \text{Normal Profit}=\text{Capital Employed}\times \frac{\text{Normal Rate of Return}}{100}\\ =3\text{,00,000}\times \frac{10}{100}=\text{Rs 30,000}\\ \text{Super Profit}=\text{Average Profit}-\text{Normal Profit}\\ =50\text{,000}-3\text{0,000}=\text{Rs 20,000}\end{array}$