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Question 11 Chapter 3 of Class 12 Part – 1 Usha Publication
11. (Super Profit Method) A firm earned net profit during the last five years as follows:
(i) Rs.7,000; (ii) Rs.6,500; (iii) Rs.8,000; (iv) Rs.7,500; (v) Rs.6,000. The capital investment of the firm is Rs.40,000. A fair return on capital in the market is 12%. Find out the value of goodwill of the business if it is based on three years purchase of average super-profits of the past five years.
| Goodwill | = |
Super Profit X Number of years’ purchase |
Numbers of years' of Purchase is given So firstly we have to calculate super profit with the help of following formula:
| Super Profit | = |
Actual Average Profit - Normal Profit |
To calcuate super profit we have to calculate the Actual Average profit and Normal Profit as following:
| Average Profit | = | Total Profit for past given years |
| Number of years | ||
| = | 7,000 + 6,500 + 8,000 + 7,500 + 6,000 | |
| 5 | ||
| = | 35,000 | |
| 5 | ||
| Average Profit | = | 7,000 |
| Normal Profit | = | Capital Employed | X | Normal Rate of Return |
| 100 | ||||
| = | 40,000 | X | 12 | |
| 100 | ||||
| Normal Profit | = | 4,800 |
| Super Profit | = | Actual Average Profit - Normal Profit |
| = | 7,000 - 4,800 | |
| Super Profit | = | 2,200 |
| Number of years’ purchase | = | 3 (Given) |
| Goodwill | = | Super Profit X Number of years’ purchase |
| = | 2,200 X 3 | |
| Goodwill | = | 6,600 |
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Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
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