Page 39 - MA-12

Goodwill: Concept and Mode of Valuation 2.5
(ii) Value of Goodwill at 3 years’ Purchase of Super Profit:

Normal Profit = Average Capital Employed × Normal Rate of Return
15
= ` 25,00,000 × = ` 3,75,000
100
Super Profit = Average Profit – Normal Profit
= ` 4,50,000 – ` 3,75,000 = ` 75,000

Goodwill = Super Profit × No. of years’ Purchase
= ` 75,000 × 3 = ` 2,25,000.

(iii) Goodwill under Capitalisation of Super Profit:
100
Goodwill = Super Profit ×
Normal Rate of Return

100
= ` 75,000 × = ` 5,00,000.
15
(iv) Goodwill under Capitalisation of Average Profit:
Average Profit
Step 1: Total Capitalised Value of the Firm = ¥100
Normal Rate of Return
` 4,50,000
= ¥100 = ` 30,00,000
15
Step 2: Net Assets = Total Assets (excluding Goodwill) – Outsiders’ Liabilities
= ` 30,00,000 – ` 2,50,000 = ` 27,50,000

Step 3: Goodwill = Total Capitalised Value of the Firm – Net Assets
= ` 30,00,000 – ` 27,50,000 = ` 2,50,000.

Master Question

Illustration 3.

Calculate Goodwill of the firm on the basis of:
(a) Three year’s purchase of the Weighted Average Profit of the last four years.
(b) Three year’s purchase of Average Profit.
(c) Three years’ purchase of Super Profit.
(d) Capitalisation of Super Profit.
(e) Capitalisation of Average Profit.
The weights assigned and profit of each year are:

Year 31st March, 2016 31st March, 2017 31st Mach, 2018 31st March, 2019
Profit (`) 2,02,000 2,48,000 2,00,000 2,80,000
Weight 1 2 3 4