Question

Following is the Balance Sheet of Usha and Sushila who share profits and losses equally.

Balance Sheet as on 31st March, 2010
Liabilities	Amount Rs.	Assets	Amount Rs.
Capital:		Land and Building	1,50,000
Usha	2,00,000	Machinery	1,00,000
Sushila	1,00,000	Debtors	80,000
Creditors	60,000	Stock	40,000
Bills Payable	40,000	Bank	30,000
	4,00,000		4,00,000

The net profits for the last three years were Rs. 60,000, Rs. 80,000 and  Rs. 1,00,000. It was decided to calculate the value of goodwill at\[2\frac{1}{2}\] years’ purchase of super profit taking into consideration the standard rate of return on the capital employed at 15%. Calculate the value of goodwill.

Answer 1

Average Profit=60,000 + 80,000 + 1,00,0003 = Rs 80,000 MathType@MTEF@5@5@+= feaagKart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacaqGbbGaaeODaiaabwgacaqGYbGaaeyyaiaabEgacaqGLbGaaeii aiaabcfacaqGYbGaae4BaiaabAgacaqGPbGaaeiDaiabg2da98aada WcaaqaaiaaiAdacaaIWaGaaiilaiaaicdacaaIWaGaaGimaiaabcca caqGRaGaaeiiaiaabIdacaqGWaGaaeilaiaabcdacaqGWaGaaeimai aabccacaqGRaGaaeiiaiaabgdacaqGSaGaaeimaiaabcdacaqGSaGa aeimaiaabcdacaqGWaaabaGaaG4maaaacaqGGaGaaeypaiaabccaca qGsbGaae4CaiaabccacaqG4aGaaeimaiaabYcacaqGWaGaaeimaiaa bcdaaaa@5F22@ " data-mathml_index="2">Average Profit=`(60.000+80.000+1.00.000)/(80,000)`

Normal or Standard Rate of Return on Capital Employed = 15%

Capital Employed = Total Assets (excluding fictitious assets) – External/Outside Liabilities

or, Capital Employed = 4,00,000 – 1,00,000 = Rs 3,00,000

\[\begin{array}{l}\text{Normal Profit = Capital Employed} \times\frac{\text{Normal Rate of Return}}{100} \\ or, \text{Normal Profit} = 3,00,000 \times\frac{15}{100}= Rs 45,000\end{array}\]

\[\begin{array}{l}\text{Super Profit = Average Profit - Normal Profit} \\ \text{or, Super Profit} = 80,000 - 45,000 = Rs\ 35,000\end{array}\]

Super Profit = Average Profit − Normal Profit or, Super Profit = 80,000−45,000 = Rs 35,000" data-mathml_index="5">

\[\begin{array}{l}\text{Goodwill = Super Profit} \times \text{Number of Years' Purchase} \\ \text{or, Goodwill} = 35,000 \times\frac{5}{2}= Rs\ 87,500\end{array}\]