Question

Find out the value of goodwill by capitalising super profits:

1. Normal Rate of Return 10%
2. Profits for the last four years are ₹ 30,000, ₹ 40,000, ₹ 50,000 and ₹ 45,000.
3. A non-recurring income of ₹ 3,000 is included in the above mentioned profit of ₹ 30,000.
4. Average capital employed is ₹ 3,00,000.

Answer 1

Years
Particulars	I	II	III	IV
Profits	30,000	40,000	50,000	45,000
(−) Non-recurring income	3,000	-	-	-
	27,000	40,000	50,000	45,000

Total profit = 27,000 + 40,000 + 50,000 + 45,000

= ₹ 1,62,000

Average profit = `"Total profit"/"Number of years"`

= `(1,62,000)/4`

= ₹ 40,500

Normal profit = `("Capital employed" xx "Normal rate of return")/100`

= `(3,00,000 xx 10)/100`

= ₹ 30,000

Super profit = Average Profit – Normal Profit

= 40,500 – 30,000

= ₹ 10,500

Capitalisation super profit method = `"Super profit"/"Normal rate of return" xx 100`

= `(10,500)/10 xx 100`

= ₹ 1,05,000