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Question

What do you mean by super profit?


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Solution

Super profit is the method in which an excess of average profits over normal profits. Under this method, goodwill is estimated on the basis of super-profits.

Super profit

When a consumer or buyer’s advantage lies in the excess of the normal return capital employed. The excess of actual/average profit over normal or average profit is called a super profit method.

Formula

The formula for super profit method is given below

Super Profit = Average Profit – Normal Profit

Super Profits Method

This method or technique is a surplus of expected future maintainable profits over normal profits. The two super profits methods of these methods are listed below:

  • The Purchase Method by Number of Years – The goodwill is established by calculating super-profits by a specific number of the purchase year. It can be evaluated by applying the formula as Super Profit = Actual or Average profit – Normal Profit
  • Annuity Method –In this method, the average super profit is taken as an annuity value over a definite number of years. A discounted amount of super profit calculates the current value of an annuity at the given rate of interest. The formula to be used here is.
    Goodwill = Super Profit x Discounting Factor

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