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Question
A firm earns profit of ₹ 5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsiders' liabilities as on the date of goodwill are ₹ 55,00,000 and ₹ 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.
Solution
(i) Calculation of Goodwill by Capitalisation of Super Profit Method :
Goodwill = Super Profit x `100/"Normal Rate of Return"`
Capital Employed = Assets - External Liabilities
= 55,00,000 - 14,00,000 = Rs. 41,00,000
Normal Profit = Capital Employed x `"Normal Rate of Return"/100`
= 41,00,000 x `10/100` = Rs. 4,10,000
Profit of the firm = Rs 5,00,000
Super Profit = Actual Profit - Normal Profit
= 5,00,000 - 4,10,000 = Rs. 90,000
∴Goodwill = 90,000 x `100/10` = Rs. 9,00,000.
(ii) Calculation of Goodwill by Capitalisation of Average Profit Method :
Goodwill = Capitalised Value Profit - Actual Capital Employed
Capitalised Value of Profit = Actual Profit x `100/"Normal Rate of Return"`
= 5,00,000 x `100/10` = Rs. 50,00,000.
Capital Employed = Assets - External liabilities
= 55,00,000 - 14,00,000 = Rs. 41,00,000
∴Goodwill = 50,00,000 - 41,00,000 = Rs. 9,00,000.
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