Question

Average profit of GS &Co. Rs.$50,000$ per year. Average capital employed in the business is Rs. $3,00,000$. 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) Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 300000

Step 2: Calculation of Normal Profit:

Normal Profit= 300000 * [10/100]

= 30000

Step 3: Calculation of Average Profit:

Average Profit= 50000

Step 4: Calculation of Super Profit:

Super Profit= 50000-30000

= 20000

Step 5: Calculation of Goodwill:

Goodwill= Super Profit * Number of years' of purchase

= 20000 * 3

= 60000

(ii) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= 300000

Step 2: Calculation of Normal Profit:

Normal Profit= 300000 * [10/100]

= 30000

Step 3: Calculation of Average Profit:

Average Profit= 50000

Step 4: Calculation of Super Profit:

Super Profit= 50000-30000

= 20000

Step 5: Calculation of Goodwill:

Goodwill= Super profit* [100/Normal Rate of return]

= 20000 * [100/10]

= 200000