Question

A business has earned average profit of ₹ 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method; and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.
​Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.

Answer 1

Capital Employed = Total Assets - External Liabilities
= Rs. ( 40,00,000 - 7,20,000) = Rs. 32,80,000

Normal Profit = `("Capital Employed" xx "Normal Rate of Return"/100)` 

= Rs. `( 32,80,000 xx 10/100)` = Rs. 3,28,000

Average Profits = Rs. 4,00,000

Super Profits = Average Profits - Normal Profit
= Rs. ( 4,00,000 - 3,28,000) = Rs. 72,000

(i) As per Capitalisation of Super Profit Method'
Goodwill = `( "Super Profit" xx 100/"Normal Rate of Return")`

= Rs. ( 72,000 x `100/10`) = Rs. 7,20,000

(ii) As per Super Profit method,
Goodwill = Super Profit x No. of years of Purchase 
= Rs. 72,000 x 3 = Rs. 2,16,000.