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Question 20 Chapter 3 of Class 12 Part – 1 Usha Publication
20. (Super Profit/Capitalisation method) A firm earns a profit of Rs.5,000 per year. The average capital employed in the business by the firm is Rs.25,000. The normal rate of return on the capital employed in similar business is 10%.
You are required to calculate goodwill of the firm by
a. Super profit method on the basis of three years purchase.
b. Capitalisation method (Both super profit & average profit).
| Actual Profits p.a | = | Rs.5,000 |
| Capital Employed | = | Rs. 25,000 |
| Rate of return | = | 10% |
| Normal Profit | = | Capital Employed | X | Normal Rate of Return |
| 100 | ||||
| = | 25,000 | X | 10 | |
| 100 | ||||
| = | 2,500 |
i) Super Normal Profit Method
| Super Profit | = | Actual Profit - Normal Profit |
| = | 5,000 - 2,500 | |
| = | 2,500 |
| Number of years’ purchase | = | 3 |
| Goodwill | = | Super Profit X Number of years’ purchase |
| = | 2,500 X 3 | |
| = | 7,500 |
ii) Capitalisation Method:
a) Capitalisation of Super Profits Method:
| Goodwill | = | Super Profit | X | 100 |
| Normal Rate of Return | ||||
| = | 2,500 | X | 100 | |
| 10 | ||||
| = | 25,000 |
b) Capitalisation of Average Profits Method:
| Capitalisation of Business | = | Average Profit | X | 100 |
| Normal Rate of Return | ||||
| = | 5,000 | X | 100 | |
| 10 | ||||
| = | 50,000 |
| Goodwill | = | Capitalised value of the business - Average Capital Employed |
| = | 50,000 - 25,000 | |
| = | 25,000 |
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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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