Question

Ideal Marketing earned an average profit of ₹ 4,00,000 during the last five years. Normal rate of return on capital employed is 10%. Balance Sheet of the firm as at 31st March, 2019 was as follows:

Liabilities		Amount (₹)	Assets	Amount ​(₹)
Capital A/cs:			Land and Building	10,00,000
Shyam	5,00,000		Furniture	2,00,000
Sunder	5,00,000	10,00,000	Investments	1,00,000
Current A/cs:			Sundry Debtors	5,00,000
Shyam	2,00,000		Bills Receivable	50,000
Sunder	2,00,000	4,00,000	Closing Stock	3,00,000
Reserves		3,40,000	Cash in Hand	50,000
Sundry Creditors		4,00,000	Cash at Bank	1,00,000
Bills Payable		1,00,000
Outstanding Expenses		60,000
		23,00,000	​	23,00,000

​Calculate the value of goodwill, if it is valued at three years' purchase of Super Profits.

Answer 1

$$\begin{gathered} \mathrm{Average}\mathrm{Profits}=₹4,00,000 \\ \mathrm{Capital}\mathrm{Employed}=\mathrm{Total}\mathrm{Assets}-\mathrm{Non}-\mathrm{Trade}\mathrm{Investments}-\mathrm{Outside}\mathrm{Liabilities}=₹(23,00,000-1,00,000-5,60,000)=₹16,40,000 \\ \mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=₹\left(16,40,000\times \frac{10}{100}\right)=₹1,64,000 \\ \mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}-\mathrm{Normal}\mathrm{Profits}=₹(4,00,000-1,64,000)=₹2,36,000 \\ \mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=₹(2,36,000\times 3)=₹7,08,000 \end{gathered}$$