Average profit of GS & Co. is ₹ 50,000 per year. Average capital employed in the business is ₹ 3,00,000. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.
Solution
(i) Goodwill = Super Profit x No. of Years Purchase
= 20,000 x 3 = Rs. 60,000
(ii) Goodwill = Super Profit x `100/"Normal Rate of Return"`
= 20,000 x `100/10` = Rs. 2,00,000
Working Notes:
WN1: Calculation of Super Profits
Average Profit = `"Total Profits for past given years"/"No. of Years"`
= Rs. 50,000
Normal Profit = Capital Employed x `"Normal Rate of Return"/100`
= 3,00,000 x `10/100` = Rs. 30,000
Super Profit = Average Profit - Normal Profit
= 50,000 - 30,000 = Rs. 20,000.
