# Chapter 3 - Goodwill: Nature And Valuation

#### A business has earned average profit of `4,00,000 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 profits. Assets of the business were  ` 40,00,000 and its external liabilities  ` 7,20,000.

Average Profit –  ` 4,00,000
Normal Rate of Return – 10%

(i) Goodwill by Capitalisation of Super profit

 goodwill =super profit ×100/ normal rate of return Capital employed = assets – external liabilities =40,00,000-7,20,000 =32,80,000 Normal profit = Capital employed×Normal rate of return/100 =32,80,000×10/100 Super Profit = Actual Profit – Normal Profit = 4,00,000 – 3,28,000 =  ` 72,000 Goodwill =72,000×100/10 = ` 7,20,000

(ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits

 Goodwill = Super Profit ×Purchases =72,000×3 =2,16,000

Therefore, Goodwill is valued at
` 2,16,000

#### Page No 3.32:

Question 32: A firm earns profit of `5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsiders' liabilities as on the date of goodwill are `55,00,000 and `14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.

Capitalised value of average profit =500,000×100/10=50,00,000

Actual capital employed= Assets – liabilities

=50,00,000-41,00,000

=9,00,000

Normal profit = 41,00,000×10/100

Super profit=5,00,000-4,10,000=90,000

Value of goodwill under super profit method

=90,000×100/10=9,00,000

#### Question 33:

On 1st April, 2018, a firm had assets of  ` 1,00,000 excluding stock of  ` 20,000. The current liabilities were  ` 10,000 and the balance constituted Partners' Capital Accounts. If the normal rate of return is 8%, the Goodwill of the firm is valued of  ` 60,000 at four years' purchase of super profit, find the actual profits of the firm.

Total Assets of the firm=(Sundry Assets + Stock)= `(1,00,000+20,000)= `1,20,000

Current Liabilities of the firm= `10,000

Capital Employed=(Total Assets - Current Liabilities)= `(1,20,000 - 10,000)= `1,10,000

Normal Profits=Capital Employed × Normal Rate of Return/100= `1,10,000×8/100= `8,800

Goodwill = Super Profits × No. of years of purchase

60,000= Super Profits × 4

Super Profits= `60,000/4= `15,000

Super Profits= Average Actual Profits - Normal Profits

15,000=Average Actual Profits - 8,800

Average Actual Profits= `(15,000+8,800)= `23,800

#### Page No 3.32:

Question 34: Average profit of a firm during the last few years is `1,50,000. In similar business, the normal rate of return is 10% of the capital employed. Calculate the value of goodwill by capitalisation of super profit method if super profits of the firm are `50,000. (CBSE 2020 C)

Super Profit = 50,000

Goodwill = Super Profit ×100/Rate of Return

Goodwill = 50,000 ×100/10

Goodwill = 5,00,000

#### Page No 3.33:

Question 35: Raja Brothers earn an average profit of `30,000 with a capital of `2,00,000. The normal rate of return in the business is 10%. Using capitalisation of super profit method, workout the value of the goodwill of the firm. (NCERT)

#### Goodwill= 10,000×100/10=1,00,000

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## Chapter-3: Goodwill: Nature and Valuation | 2021-2022

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