Question

A business has earned average profits of ₹ 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:

1. Capitalisation of super profit method and
2. Super profit method if the goodwill is valued at 3 years purchase of super profit.

The assets of the business were ₹ 10,00,000 and its external liabilities were ₹ 1,80,000.

Answer 1

Given:

Average Profit = ₹ 1,00,000

Normal Rate of Return (NRR) = 10%

Assets = ₹ 10,00,000

External Liabilities = ₹ 1,80,000

Capital Employed = Assets − External Liabilities

= 10,00,000 − 1,80,000

= ₹ 8,20,000

Normal Profit = Capital Employed `xx "NRR"/100`

= `8,20,000xx10/100`

= ₹ 82,000

Super Profit = Average Profit − Normal Profit

= 1,00,000 − 82,000

= ₹ 18,000

Goodwill = `"Super Profit" xx 100/"NRR"`

= `18,000 xx 100/10`

= ₹ 1,80,000

Goodwill = Super Profit × 3

= 18,000 × 3

= ₹ 54,000