Average profit
Define goodwill.
Goodwill is an intangible asset associated with the purchase of one company by another
Define super profit.
It is the excess of average (or actual) profit over the normal profit expected from a business.
What is capitalisation?
Capitalisation method in goodwill is a way of valuing goodwill by using the firm’s overall earning capacity.
Formula for goodwill under this method.
Goodwill=Normal RateSuper Profit×100
What are the two types of goodwill and give a basic meaning to it.
Purchased goodwill: The goodwill for which the the firm has paid consideration in cash or kind
Self generated goodwill: It is an internally generated goodwill which arise from factors such as favorable location,effiencent managment etc
Give the formula of super profit method
Goodwill = Super Profit × Years’ Purchase
Where:
Super Profit = Average Profit – Normal Profit
Formula for capitalised value of average profit .
Goodwill=Capitalised Value−Capital Em
What is normal rate of return?
NRR = Normal Rate of Return
It is the rate of profit expected on the capital invested in a business.
Find the average profit of the below amounts
Profit for 3 years are 25000,14000,18000
Average profit = ₹40,000
Capital employed = ₹5,00,000
Normal rate = 10%
Calculate super profit and comment on goodwill
Normal profit = 5,00,000 × 10% = ₹50,000
Super profit = Average profit – Normal profit
= 40,000 – 50,000 = –₹10,000
Average profit = ₹30,000, Normal rate = 10% → Find capitalised value
Capitalised Value = ₹3,00,000
Goodwill = ₹80,000
Years’ purchase = 4 Find super profit
Super Profit = ₹20,000
Profits for 4 years: ₹20,000; ₹25,000; ₹30,000; ₹35,000
Abnormal loss of ₹5,000 is included in the 2nd year
Calculate average profit
Average profit is ₹28,750.
Capital employed = ₹5,00,000
Normal rate = 10%
Average profit = ₹70,000
Calculate super profit
Normal profit = 5,00,000 × 10% = ₹50,000
Super profit = 70,000 – 50,000 = ₹20,000 😌
Average profit = ₹50,000
Normal rate = 10%
Actual capital employed = ₹4,00,000
Calculate goodwill
Goodwill = ₹1,00,000
Question:
Goodwill = ₹60,000
Years’ purchase = 3
Normal profit = ₹15,000
Find average profit
Average Profit = ₹35,000
Profits: ₹40,000; ₹50,000; ₹60,000
Abnormal gain of ₹10,000 included in 1st year
Normal profit = ₹45,000
Years of purchase = 3
Calculate goodwill using average profit method
The value of Goodwill is ₹1,40,000.
Profits: ₹60,000; ₹70,000; ₹80,000
Capital employed = ₹6,00,000
Normal rate = 10%
Years’ purchase = 4
Calculate goodwill using super profit method
Goodwill = ₹40,000
Profits: ₹40,000; ₹50,000; ₹60,000
Normal rate = 10%
Actual capital employed = ₹4,50,000
Calculate goodwill using capitalisation of average profit method
Goodwill = ₹50,000
Profits: ₹70,000; ₹80,000; ₹90,000
Capital employed = ₹8,00,000
Normal rate = 10%
Calculate goodwill using capitalisation of super profit method
Goodwill = ₹0 (No goodwill, since no super profit)