Question

A business has earned average profit Rs. 1,00,000 during the last few years and the normal rate of return in similar business is 10%. Find out the value of goodwill.

1. Capitalisation of super profit method. 

2. Super profit method of the goodwill is valued at 3 years purchase of super profit. The assets of the business were Rs. 10,00,000 and liabilities of Rs. 1,80,000.

Answer 1

1. Capital employed = Assets – libilities 

= 10,00,000 – 1,80,000 

= Rs. 8,20,000 

Normal profit = Capital employed x (Normal rate of return)/100

8,20,000 = 1 x 10/100

= 82,000

Super profit = Average profit – Normal profit 

= Rs. 1,00,000 – Rs. 82,000 

= Rs. 18,000

2. Capitalisation method Super profit 

Goodwill = (Super profit)/(Normal rate of retuen) x 100 

= 18,000/10

= Rs. 1, 80,000 

As per super profit method Goodwill = super profit x No. of years purchase 

= Rs. 18000 x 3 

= Rs. 54,000