12goodwill2022-2023

Rajan and Rajani are partners in a firm. Their capitals were Rajan  ` 3,00,000; Rajani  ` 2,00,000. During the year 31^st March, 2022, the firm earned a profit of  ` 1,50,000. Calculate the value of goodwill of the firm by capitalisation of super profit assuming that the normal rate of return is 20%.

Goodwill=Super Profits×100/Nominal Rate of Return

Super Profits=Average Profit-Normal Profit

Average Profit= `1,50,000 

(Given)Normal Profit=Capital Employed×Normal Rate of Return

Normal Profit=(3,00,000+2,00,000)×20%= `1,00,000

Super Profit=1,50,000-1,00,000= `50,000

Goodwill=50,000×100/20= ` 2,50,000

 

Average profit of GS & Co. is ` 50,000 per year. Average capital employed in the business is  ` 3,00,000. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.

(i)        Goodwill	=Super Profit×No. of Years' Purchase              =20,000×3= ` 60,000
(ii)        Goodwill	=Super Profit×100/Normal Rate of Return               =20,000×100/10 = ` 2,00,000

Working Notes:

WN1: Calculation of Super Profits

Average Profit=Total Profits for past given years/No. of Years                        

= ` 50,000

Normal Profit=Capital Employed×Normal Rate of Return/100                       

=3,00,000×10/100= ` 30,000

Super Profit=Average Profit-Normal Profit                    

=50,000-30,000= ` 20,000

A business has earned average profit of  ` 8,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method; and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.
 Assets of the business were ` 80,00,000 and its external liabilities  ` 14,40,000.

Capital Employed=Total Assets - External Liabilities

                             = `(80,00,000-14,40,000)= `65,60,000

Normal Profits=Capital Employed × Normal Rate of Return/100

                          = `65,60,000×10/100= `6,56,000

Average Profits= `8,00,000

Super Profits=Average Profits - Normal Profits

                     = `(8,00,000 - 6,56,000)= `1,44,000

 

(i)As per Capitalisation of Super Profit method,Goodwill=Super Profit×100Normal Rate of Return

                                                                                           = `1,44,000×100/10= `14,40,000 (ii)As per Super Profit method,Goodwill=Super Profit × No. of years of purchase

                                                                = `(1,44,000×3)= `4,32,000

From the following information, calculate value of goodwill of the firm:
(i) At three years' purchase of Average Profit.
(ii) At three years' purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average profit.
Information:
(a) Average Capital Employed is  ` 6,00,000.
(b) Net Profit/(Loss) of the firm for the last three years ended are:
31st March, 2022 −  ` 2,00,000, 31st March, 2021 −  ` 1,80,000, and 31st March, 2020 −  ` 1,60,000.
(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of  ` 1,00,000 to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) is  ` 7,00,000 whereas Partners' Capital is  ` 6,00,000 and Outside Liabilities  ` 1,00,000.

(i) Goodwill	=Average Profit×No. of years' purchase               =80,000×3= ` 2,40,000
(ii) Goodwill	=Super Profit×No. of years' purchase               =20,000×3= ` 60,000
(iii) Goodwill	=Super Profit×100÷Normal Rate of Return               =20,000×100/10= ` 2,00,000
(iv) Goodwill	=Capitalised Value-Net Assets                =8,00,000-6,00,000= ` 2,00,000

 

Working Notes:

WN1: Calculation of Average and Super Profits
Average Profit=Total Profits of past years given/No. of Years

=2,00,000+1,80,000+1,60,000/3                        

= ` 1,80,000, 

 

Average Profit (Adjusted) =  ` 1,80,000 - 1,00,000 (Remuneration to partners)                                          

=  ` 80,000

Normal Profit=Capital Employed×Normal Rate of Return/100                       

=6,00,000×10/100= ` 60,000

 

Super Profit=Average Profit (Adjusted)-Normal Profit                    

=80,000-60,000= ` 20,000

WN2: Calculation of Capital Employed

Capital Employed=Total Assets-Outside Liabilities                              

=7,00,000-1,00,000

= ` 6,00,000