Question

Average profit of the firm is ₹ 2,00,000. Total assets of the firm are ₹ 15,00,000 whereas Partners' Capital is ₹ 12,00,000. If normal rate of return in a similar business is 10% of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?

Answer 1

Goodwill = Super Profits x `100/"Normal Rate of Return"`

= 80,000 x `100/10` = Rs. 8,00,000.

Working Notes:
WN1: Calculation of Super Profits
Average Profit = `"Total Profit for past given years"/"Number of years"`
= Rs. 2,00,000

Normal Profit = Capital Employed x `"Normal Rate of Return"/100`
= 12,00,000 x `10/100` = Rs. 1,20,000

Super Profit = Average Profit - Normal Profit
= 2,00,000 - 1,20,000 = Rs. 80,000.

WN2: Calculation of Capital Employed
Capital Employed = Total Assets - Outside Liabilities
= 15,00,000 - 3,00,000 = Rs. 12,00,000.