Page 62 - DEBKVOL-1

3.4 Double Entry Book Keeping—CBSE XII
Illustration 3.
On 1st April, 2018, an existing firm had assets of ` 75,000 including cash of ` 5,000.
Its creditors amounted to ` 5,000 on that date. The firm had a Reserve Fund of
` 10,000 while Partners’ Capital Accounts showed a balance of ` 60,000. If the normal rate of
return is 20% and the Goodwill of the firm is valued at ` 24,000, at four years’ purchase of super
profit, find the average profit per year of the existing firm.
Solution:
Goodwill is valued at four years’ purchase of Super Profit, which is ` 24,000.
Therefore, Goodwill = Super Profit × 4
or ` 24,000 = Super Profit × 4
or Super Profit = ` 24,000/4 = ` 6,000
Again, Normal Profit = Capital Employed × Normal Rate of Return/100
= (Capital + Reserve) × 20/100
= (` 60,000 + ` 10,000) × 20/100 = ` 14,000.
Super Profits are the excess of average profit over normal profit.
Therefore, Super Profit = Average Profit – Normal Profit
or ` 6,000 = Average Profit – ` 14,000
or Average Profit = ` 14,000 + ` 6,000 = ` 20,000.
Illustration 4.
X and Y are partners sharing profits equally. They decide to admit Z for an equal share. For
this purpose, the Goodwill is to be valued on the basis of capitalisation of average profit. The
net assets of the firm are ` 3,20,000. Average maintainable profit of the firm is ` 45,000. The
normal rate of return may be taken as 12% p.a. Calculate the Value of Goodwill according to
Capitalisation of Average Profit Method.

Solution:
Average Maintainable Profit
Capitalised Value of the Firm = × 100
Normal Rate of Return
= ` 45,000 × 100 = ` 3,75,000.
12
Goodwill = Capitalised Value of the Firm – Net Assets
= ` 3,75,000 – ` 3,20,000 = ` 55,000.

Illustration 5.
A firm earns ` 80,000 as its average profits. The rate of normal profit being 10%, the assets of
the firm amounted to ` 10,00,000 and liabilities are ` 4,40,000. Calculate the value of Goodwill
according to Capitalisation of Average Profit Method.
Solution: ` 80,000 ¥100
Capitalised Value of the Firm = = ` 8,00,000.
10
Net Assets = Total Assets – Outside Liabilities
= ` 10,00,000 – ` 4,40,000 = ` 5,60,000
Goodwill = Capitalised Value of the Firm – Net Assets
= ` 8,00,000 – ` 5,60,000 = ` 2,40,000.