Question

A firm earns profit of ₹ 5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsiders' liabilities as on the date of goodwill are ₹ 55,00,000 and ₹ 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.

Answer 1

(i) Calculation of Goodwill by Capitalisation of Super Profit Method :
Goodwill = Super Profit x `100/"Normal Rate of Return"`

Capital Employed = Assets - External Liabilities
= 55,00,000 - 14,00,000 = Rs. 41,00,000

Normal Profit = Capital Employed x `"Normal Rate of Return"/100`
= 41,00,000 x `10/100` = Rs. 4,10,000

Profit of the firm = Rs 5,00,000
Super Profit = Actual Profit - Normal Profit
= 5,00,000 - 4,10,000 = Rs. 90,000

∴Goodwill = 90,000 x `100/10` = Rs. 9,00,000.

(ii) Calculation of Goodwill by Capitalisation of Average Profit Method :
Goodwill = Capitalised Value Profit - Actual Capital Employed

Capitalised Value of Profit = Actual Profit x `100/"Normal Rate of Return"`

= 5,00,000 x `100/10` = Rs. 50,00,000.

Capital Employed = Assets - External liabilities
= 55,00,000 - 14,00,000 = Rs. 41,00,000

∴Goodwill = 50,00,000 - 41,00,000 = Rs. 9,00,000.