A business has earned average profit of Rs. 60,000 during the last few

1.	A business has earned average profit of Rs. 60,000 during the last few years. The assets of the business are Rs. 5,40,000 and its external liabilities are Rs. 80,000. The normal rate of return is 10%. Calculate the value of goodwill on the basis of capitalisation of super profits.
Answer» (i) Capital employed = Assets – Liabilities = 540000 – 80000 = Rs. 460000 (ii) Normal Profit = Capital employed X Normal rate of return/100 = Rs. (460000 X 10/100) = 46000 (iii) Super Profit = Firm’s Average profit – Normal Profit = 60000 – 46000 = 14000 (iv) Goodwill = Super profit X 100/ Normal rate of return = (14000 X 100/ 10) = 140000

A business has earned average profit of Rs. 60,000 during the last few years. The assets of the business are Rs. 5,40,000 and its external liabilities are Rs. 80,000. The normal rate of return is 10%. Calculate the value of goodwill on the basis of capitalisation of super profits.

Answer»

(i) Capital employed = Assets – Liabilities

= 540000 – 80000

= Rs. 460000

(ii) Normal Profit = Capital employed X Normal rate of return/100

= Rs. (460000 X 10/100)

= 46000

(iii) Super Profit = Firm’s Average profit – Normal Profit

= 60000 – 46000

= 14000

(iv) Goodwill = Super profit X 100/ Normal rate of return

= (14000 X 100/ 10)

= 140000