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Question
A business has earned average profits of 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 by
(i) Capitalisation of super profit method and
(ii) Super profit method if the goodwill is valued at 3 years purchase of super profit.
The assets of the business were Rs 10,00,000 and its external liabilities Rs 1,80,000.
Solution
(i) Capitalisation of Super Profit Method
`Goodwill= "Super Profit" /"Normal rate of Retuns"xx100`
Super Profit = Average Profit − Normal Profit
Average Profit = Rs 1,00,000
`"Normal Profit" = "Capital Employed"xx"Normal Rate of Return"/100`
Capital Employed = Assets − Liabilities
= 10,00,000 −1,80,000 = Rs 8,20,000
Normal Profit= `8,20,000xx10/100="Rs" 82,000`
Super Profit = 1,00,000 −82,000 = Rs 18,000
∴ `"Goodwill"= (18,0000)/10xx100="Rs" 1,80,000`
(ii) Super Profit Method
Goodwill = Super Profit × No. of Years of Purchase
= 18,000 × 3 = Rs 54,000
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RELATED QUESTIONS
Following is the Income statements of Raj Ltd. For the year ended 31-3-2011:
|
Particulars |
Amount Rs |
|
Income: |
|
|
Sales |
2,00,000 |
|
Other Incomes |
15,000 |
|
Total Income |
2,15,000 |
|
|
|
|
Expenses: |
|
|
Cost of goods sold |
1,10,000 |
|
Operating expenses |
5,000 |
|
Total Expenses |
1,15,000 |
|
Tax |
40,000 |
Prepare a common size Income Statements of Raj Ltd. for the year ended 31-3-2011.
A, B, C and D are partners sharing profits in the ratio of 3 : 3 : 2 : 2 respectively. D retires and A, B and C decide to share the future profits in the ratio of 3 : 2 : 1. Goodwill of the firm is valued at Rs 6,00,000. Goodwill already appears in the book at Rs 4,50,000. The profits for the first year after D’s retirement amount to Rs 12,00,000. Give the necessary Journal entries to record Goodwill and to distribute the profits. Show your calculations clearly.
What is goodwill? What are the factors that effect goodwill?
What are the factors affecting goodwill?
Which of the following factors do not affect the goodwill of the firm?
