Goodwill by capitalisation of super profit method

This slide Will help to understand comparison between different types of plans.

1. Goodwill by capitalisation
of super profit method
By Raj Narayan Yadav

2. Capitalisation method

Capitalisation of average
profit
Capitalisation of super
profit
1
2

3. Capitalisation by super profit method
Goodwill = super profit x
Normal rate of return
100
Super profit = actual/average profit - normal profit
Normal profit = capital employed x normal rate
100
●Capital employed = Total assets - goodwill - non trade investments - fictitious assets - outside liabilities

●Capital employed = capital of partners + reserves - goodwill - non trade investments - fictitious assets -
outside liabilities.

4. ILLUSTRATION
Average profit of the firm is 1,50,000. Total tangible assets in the firm are ₹14,00,000 and outside
liabilities are ₹4,00,000. In the same type of business, the normal rate of return is 10% of capital
employed.
Calculate value of goodwill by capitalisation of super profit method.
SOLUTION
Given: average profit = ₹ 1,50,000
Total assets = ₹14,00,000
Outside liabilities = ₹4,00,000
Normal rate = 10%

Goodwill = super profit x 100
rate
= 59,000 x 100
10
= 5,90,000


Super profit = average - normal profit
= 1,50,000 - capital employed x rate
100
= 1,59,000 - 10,00,000 x 10
= 59,000 100

5. ILLUSTRATION
From the following information, calculate value of goodwill of Raj :
(a)On the basis of capitalisation of super profit.
(b)On the basis of capitalisation of average profit.

INFORMATION:

(1)Average capital employed- ₹ 10, 00,000.
(2)Net profit/loss of the firm for the past years: 2018-₹1, 60,000.,2019- ₹ 1,40,000., 2020-₹
2,70,000.
(3)Normal rate of return on capital is 11 %
(4)Remuneration to each partner for his service to be treated as a charge on profit-₹ 2,500
per month.
(5)Assets (excluding goodwill) ₹ 11,00,000., Liabilities-₹ 1,00,000.

6. Solution:
(a)Goodwill by capitalisation of super profit= super profit x 100
rate
Super profit= average normal profit - normal profit
= ₹ 1,30,000 - ₹ 1,10,000
= ₹ 20,000

Goodwill= super profit x 100
11
= 20,000 x100
11
= ₹ 1,81,118.18 or ₹ 1,81,818.

●Average normal profit= average profit - remuneration of partners
= ₹ 1,90,000 - (₹ 2,500 x 2 x 12)
= ₹ 1,30,000

●Normal profit= capital employed x rate
100
= 10,00,000 x 11 = 1,10,000
100
Average profit= ₹ 1,60,0000+₹ 1,40,000+₹ 2,70,000
3
= ₹ 1,90,000

7. (b) Goodwill by capitalisation of average profit = Total capitalized value - Net assets

= average profit x 100 - total assets (excluding goodwill) - outside liabilities
normal rate of return

= ₹ 1,30,000 x 100 - ₹ 11,00,000 - ₹ 1,00,000
11

= ₹ 11,81,800- ₹ 10,00,000

= ₹ 1,81,818