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A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in similar business is 10%. Find out the value of Goodwill by (i) Capitalisation of super profit method and (ii) Super profit method if the goodwill is valued at 3 years purchase of super profit. The assets of the business were Rs. 10,00,000 and its external liabilities Rs. 1,80,000.

Answer

(i) Calculation of good will by capitalisation of super profit method:

* Average profit earned by the firm = Rs 1,00,000 

* Capital employed = Asset – Liabilities

 

= 10,00,000 – 1,80,000= 8,20,000 

* Normal profit = capital employed* normal rate of return

 

= 8,20,000* 10% = 82,000 

* Super Profit = Average profit earned – Normal profit

 

= 1,00,000- 82,000 = 18000 

* Good will = Capitalisation of super profit = Super profit * 100/ Normal rate of return

 

=18000*100/10 =Rs 1,80,000/- 

(ii) Calculation of good will by super profit method:

 

Average profit earned by the firm = 1,00,000
Normal profit earned = capital employed * normal rate of return

Capital employed = asset – liabilities = 8,20,000
Normal profit = 820000* 10/100 =82,000 

Super profit = average profit – normal profit
= 1,00,000 – 82,000 = 18,000 

Goodwill valued at 3 years purchase of super profit = 18000* 3 = Rs 54000/-