Calculation of Goodwill by Super Profit Capitalisation Method

Introduction
Goodwill is an intangible asset that represents the reputation, brand name, customer base, and other non-physical assets of a business. It is calculated by various methods, one of which is the Super Profit Capitalisation Method. This method calculates the value of goodwill based on the excess profit earned by a business over and above the normal rate of return on capital employed.

Given Data
- Capital employed in the firm: 500000
- Normal rate of return: 10% per annum
- Annual salary of each partner: 8000
- Average profit for last 10 years: 80000

Step 1: Calculation of Normal Profit
Normal profit is the return expected from the capital employed at the normal rate of return. It is calculated as follows:
Normal Profit = Capital employed x Normal Rate of Return
= 500000 x 10% = 50000

Step 2: Calculation of Super Profit
Super profit is the excess profit earned by the business over and above the normal profit. It is calculated as follows:
Super Profit = Average Profit - Normal Profit
= 80000 - 50000 = 30000

Step 3: Calculation of Super Profit Capitalisation
Super profit capitalisation is the process of determining the value of goodwill by capitalising the super profit at a certain number of years. It is calculated as follows:
Super Profit Capitalisation = Super Profit x Number of years Purchase
= Super Profit x (100 / Normal Rate of Return)
= 30000 x (100 / 10) = 300000

Step 4: Calculation of Goodwill
Goodwill is the difference between the super profit capitalisation and the capital employed. It is calculated as follows:
Goodwill = Super Profit Capitalisation - Capital Employed
= 300000 - 500000 = -200000

Conclusion
The value of goodwill by super profit capitalisation method is negative, which indicates that the business is not generating enough profit to justify the capital employed. This may be due to various factors such as inefficient management, high expenses, or low sales. The partners may need to revaluate their business strategies to improve profitability and increase the value of goodwill.