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Question
A business has earned average profit of ₹ 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find 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 profits.
Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
Solution
Average Profit – Rs 4,00,000
Normal Rate of Return – 10%
(i)Goodwill by Capitalisation of Super profit
Goodwill = Super Profits x `100/"Normal Rate of Return"`
Capital Employed = Assets - External Liabilities
= 40,00,000 - 7,20,000
= Rs. 32,80,000
Normal Profit = Capital Employed x `"Normal Rate of Return"/100`
= 32,80,000 x `10/100` = Rs. 3,28,000
Super Profit = Actual Profit – Normal Profit
= 4,00,000 – 3,28,000
= Rs 72,000
Goodwill = 72,000 x `100/10` = Rs. 7,20,000.
(ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits
Goodwill = Super Profits x Number of Years of Purchase
= 72,000 x 3 = Rs. 2,16,000
Therefore, Goodwill is valued at Rs 2,16,000.
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