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 profits. - Accountancy

Sum

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 profits.
Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.

Solution

Average Profit – Rs 4,00,000
Normal Rate of Return – 10%
(i)Goodwill by Capitalisation of Super profit
Goodwill = Super Profits x 100/"Normal Rate of Return"

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

Normal Profit = Capital Employed x "Normal Rate of Return"/100

= 32,80,000 x 10/100 = Rs. 3,28,000

Super Profit = Actual Profit – Normal Profit
= 4,00,000 – 3,28,000
= Rs 72,000

Goodwill = 72,000 x 100/10 = Rs. 7,20,000.

(ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits
Goodwill = Super Profits x Number of Years of Purchase
= 72,000 x 3 = Rs. 2,16,000

Therefore, Goodwill is valued at Rs 2,16,000.

Is there an error in this question or solution?

APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 3 Goodwill: Nature and Valuation
Exercise | Q 40 | Page 35