Question

Following is the Balance Sheet of Anil and Sunil.

Balance Sheetas on 31st March, 2008
Liabilities		Amount (Rs)	Assets	Amount (Rs)
Capitals :
Anil		3,60,000	Machinery	3,60,000
Sunil		2,40,000	Computer	60,000
Profit and Loss A/c		60,000	Stock in trade	2,70,000
Creditors		93,000	Debtors	1,26,000
Bank overdraft		87,000	Cash	24,000
		8,40,000		8,40,000

The Profit and Losses for the last 5 years were:

Years	2003-04	2004-05	2005-06	2006-07	2007-08
(Rs)	1,50,000	1,80,000	72,000	12,000	60,000
	(Profit)	(Profit)	(Profit)	(Loss)	(Profit)

You are required to calculate the value of Goodwill at 5 years’ purchase of super profit assuming that the normal rate of return is 10% on capital employed in the similar business.

Answer 1

\[\begin{array}{ccl}\text{Average Profit &} = & \frac{\text{Sum of 5 years' profits excluding losses}}{5} \\ = & \frac{1, 50, 000 + 1, 80, 000+ 72,000 - 12,000 + 60,000}{5} \\ = & \frac{4, 50, 000}{5} \\ = & Rs 90,000\end{array}\]

Normal Profit = Capital Employed × Rate of Return

\[\begin{array}{ccl}\text{Capital Employed} & = & \text{Share Capital + Free Reserves}- \text{ Fictitious Assets}  \\ = & (\text{3,60,000 + 2,40,000}) \text{+ 60,000} \\ = & 6,60,000\end{array}\]

\[\begin{array}{ccl}\text{Normal Profit} & = & \text{Capital Employed} \times \text{Rate of Return} \\ = & 6,60,000 \times \frac{10}{100} = Rs 66,000\end{array}\]

\[\begin{array}{ccl}\text{Super Profit} & = & \text{Average Profit} -  \text{Normal Profit} \\ = & 90,000 -  66,000 = Rs 24,000\end{array}\]

Goodwill is valued at five years purchase of the super profit.

Goodwill = 5 × Super Profit = 5 × 24,000 = Rs 1,20,000