Average Profit ₹ 4,40,000, Capital Employed ₹ 8,00,000; Normal Rate of Return 15%. Management during this period is estimated to be ₹ 2,00,000. Calculate the value of goodwill on the basis of two years' purchase of Super Profit.
Answer (2)
The question asks you to determine the value of goodwill based on the Super Profit method, which involves several steps. Here's how you can approach this:
Calculate Normal Profit :
The Normal Profit is determined by using the formula:
Normal Profit = 100 Capital Employed × Normal Rate of Return
Given that the Capital Employed is ₹8,00,000 and the Normal Rate of Return is 15%,
Normal Profit = 100 8 , 00 , 000 × 15 = ₹1 , 20 , 000
Calculate Super Profit :
Super Profit is the excess of Average Profit over Normal Profit.
Super Profit = Average Profit − Management Estimates − Normal Profit
Given that the Average Profit is ₹4,40,000 and management estimates during this period are ₹2,00,000,
Super Profit = 4 , 40 , 000 − 2 , 00 , 000 − 1 , 20 , 000 = ₹1 , 20 , 000
Calculate Goodwill using Super Profit :
The value of goodwill based on Super Profit is calculated by multiplying the Super Profit by the number of years of purchase. According to the question, this is two years:
Goodwill = Super Profit × 2 = 1 , 20 , 000 × 2 = ₹2 , 40 , 000
Therefore, the value of goodwill on the basis of two years' purchase of Super Profit is ₹2,40,000.
To find the goodwill, we first calculate the normal profit, which is ₹1,20,000. Then, we calculate the super profit, arriving at ₹3,20,000, and finally, we calculate the goodwill as ₹6,40,000, based on two years of super profit. Therefore, the goodwill value is ₹6,40,000.
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