Question

Average profit of the firm is ₹ 2,00,000. Total assets of the firm are ₹ 15,00,000 whereas Partners' Capital is ₹ 12,00,000. If normal rate of return in a similar business is 10% of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?

Answer 1

$\begin{array}{l}\text{Goodwill}=\text{Super Profit}\times \frac{\text{100}}{\text{Normal Rate of Return}}\\ =\text{80,000}\times \frac{100}{10}=\text{Rs 8,00,000}\end{array}$

Working Notes:

WN1: Calculation of Super Profits

$\begin{array}{l}\text{Average Profit}=\frac{\text{Total Profit for past given years}}{\text{Number of Years}}\\ =\text{Rs 2,00,000}\\ \text{Normal Profit}=\text{Capital Employed}\times \frac{\text{Normal Rate of Return}}{100}\\ =\text{12,00,000}\times \frac{10}{100}=\text{Rs 1,20,000}\\ \text{Super Profit}=\text{Average Profit}-\text{Normal Profit}\\ =2,00\text{,000}-\text{1,20,000}=\text{Rs 80,000}\end{array}$

WN2: Calculation of Capital Employed

$\begin{array}{l}\text{Capital Employed}=\text{Total Assets}-\text{Outside Liabilities}\\ =15\text{,00,000}-3\text{,00,000}=\text{Rs 12,00,000}\end{array}$