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Question
Ideal Marketing earned an average profit of ₹ 4,00,000 during the last five years. Normal rate of return on capital employed is 10%. Balance Sheet of the firm as at 31st March, 2019 was as follows:
| Liabilities | Amount (₹) |
Assets | Amount (₹) |
|
| Capital A/cs: | Land and Building | 10,00,000 | ||
| Shyam | 5,00,000 | Furniture | 2,00,000 | |
| Sunder | 5,00,000 | 10,00,000 | Investments | 1,00,000 |
| Current A/cs: | Sundry Debtors | 5,00,000 | ||
| Shyam | 2,00,000 | Bills Receivable | 50,000 | |
| Sunder | 2,00,000 | 4,00,000 | Closing Stock | 3,00,000 |
| Reserves | 3,40,000 | Cash in Hand | 50,000 | |
| Sundry Creditors | 4,00,000 | Cash at Bank | 1,00,000 | |
| Bills Payable | 1,00,000 | |||
| Outstanding Expenses | 60,000 | |||
| 23,00,000 | | 23,00,000 | ||
Calculate the value of goodwill, if it is valued at three years' purchase of Super Profit.
Solution
Average Profit = Rs. 4,00,000
Capital Employed = Total Assets - (Non - Trade Investment) - Outside Liabilities
= Rs. ( 23,00,000 - 1,00,000 - 5,60,000) = Rs. 16,40,000.
Normal Profits = `("Capital Employed" xx "Normal Rate of Return"/100)`
= Rs. `( 16,40,000 xx 10/100 )` = Rs. 164,000.
Super Profits = Average Profits - Normal Profits
= Rs. ( 4,00,000 - 1,64,000) = Rs. 2,36,000
Goodwill = Super Profits x No. of Years of Purchase
= Rs. (2,36,000 x 3) = Rs. 7,08,000.
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