A firm earns a profit of Rs 5,00,000

31 :- A firm earns a profit of Rs 5,00,000. The normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsider’s liabilities as on the date of goodwill are Rs 55,00,000 and Rs 14,00,000 respectively. Calculate the value of goodwill according to the Capitalisation of the Super Profit Method as well as the Capitalisation of the Average Profit Method.     

Solution:-

CASE 1:-
Calculation of goodwill by Capitalisation of Super profit method
Capital employed = Total assets (excluding goodwill) – Outside liability
                             = 55,00,000 – 14,00,000
                             = Rs 4,10,000

Normal profit = Capital employed x Normal rate of return
                     = 41,00,000 x 10/100
                     = Rs 4,10,000

Super profits = Average profit – Normal profit
= 5,00,000 – 4,10,000
= Rs 90,000

Calculation of Goodwill by capitalization of super profit
Goodwill = Super profit/Normal rate of return
               = 90,000 x 100/10
               = Rs 9,00,000

CASE 2:- Calculation of goodwill by capitalization of average profit
Capital employed = Total assets – Outsides liabilities
                             = 55,00,000 – 14,00,000
                             = Rs 41,00,000

Capitalised value of Average profit = Average profit/Normal rate of return
                                                       = 5,00,000 x 100/10
= Rs 5000,000

Goodwill = Capitalized value of average profit – Capital employed
               = 50,00,000 – 41,00,000
= Rs 9,00,000