36 :- A business has earned average profit of Rs 8,00,000 during the last few year and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalization of super profit method, and
(ii) Super profit method if the goodwill is valued at 3 years purchase of super profit.
Assets of the business were Rs 80,00,000 and its external liabilities Rs 14,40,000.
Solution:-
CASE 1 : Calculation of Goodwill by capitalization of super profit method
Calculation of Normal profit
Normal profit = Capital employed x Normal rate of return
= (80,00,000 – 14,40,000) x 10%
= 65,60,000 x 10%
= Rs 6,56,000
Calculation of Super profit
Super profit = Average profit – Normal profit
= 8,00,000 – 6,56,000
= Rs 1,44,000
Calculation of Goodwill of the firm
Goodwill = Super profit/Normal rate of return
= 1,44,000 x 100/10
= Rs 14,40,000
CASE 2: Calculation of goodwill by super profit method
Goodwill = Super profits x No. of years purchased
= 1,44,000 x 3
= Rs 4,32,000