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The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ?
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The profit and losses for the previous years are 2015 profit ₹ 10,000 ...
Calculation of Super Profits
Calculation of Goodwill
Explanation
Goodwill is an intangible asset that represents the value of a business beyond its tangible assets. The value of goodwill is calculated by subtracting the fair value of net assets from the total purchase price of a business. In this case, we have calculated the value of goodwill based on the two years purchase of super profits method.
Super profits are the excess profits earned by a business over and above the normal rate of return that investors would expect from their capital. In this case, we have calculated the super profits for the years 2015 to 2018 based on the expected rate of interest of 10%. We have then calculated the average of the 3 years super profits, which is ₹ 23,333.
To calculate the value of goodwill, we have used the two years purchase of super profits method. This involves multiplying the average super profit by the number of years of purchase, which in this case is 2. We have then subtracted the capitalization of super profit from this amount to arrive at the value of goodwill.
The capitalization of super profit is the amount of capital required to generate the excess profit earned by the business. In this case, we have divided the super profit by the expected rate of return of 10% to arrive at the capitalization of super profit, which is ₹ 33,330.
Overall, the value of goodwill represents the value of the business beyond its tangible assets, and is an important factor to consider when valuing a business for sale or purchase.
- Super profit for 2015 = ₹ 0 (no super profit as profit earned was equal to expected rate of interest)
- Super loss for 2016 = ₹ 7,000 (loss incurred was greater than expected rate of interest)
- Super profit for 2017 = ₹ 7,000 (profit earned was greater than expected rate of interest)
- Super profit for 2018 = ₹ 55,000 (profit earned was greater than expected rate of interest)
- Average of 3 years super profits = ₹ 23,333 (₹ 7,000 + ₹ 7,000 + ₹ 55,000 / 3)
Calculation of Goodwill
- Super profits based on average of 3 years = ₹ 23,333
- Two years purchase of super profits = ₹ 46,666 (2 x ₹ 23,333)
- Normal profit = 10% of average capital employed = ₹ 20,000 (10% of ₹ 2,00,000)
- Super profit = ₹ 3,333 (₹ 23,333 - ₹ 20,000)
- Capitalization of super profit = ₹ 33,330 (₹ 3,333 / 10%)
- Goodwill = ₹ 13,336 (₹ 46,666 - ₹ 33,330)
Explanation
Goodwill is an intangible asset that represents the value of a business beyond its tangible assets. The value of goodwill is calculated by subtracting the fair value of net assets from the total purchase price of a business. In this case, we have calculated the value of goodwill based on the two years purchase of super profits method.
Super profits are the excess profits earned by a business over and above the normal rate of return that investors would expect from their capital. In this case, we have calculated the super profits for the years 2015 to 2018 based on the expected rate of interest of 10%. We have then calculated the average of the 3 years super profits, which is ₹ 23,333.
To calculate the value of goodwill, we have used the two years purchase of super profits method. This involves multiplying the average super profit by the number of years of purchase, which in this case is 2. We have then subtracted the capitalization of super profit from this amount to arrive at the value of goodwill.
The capitalization of super profit is the amount of capital required to generate the excess profit earned by the business. In this case, we have divided the super profit by the expected rate of return of 10% to arrive at the capitalization of super profit, which is ₹ 33,330.
Overall, the value of goodwill represents the value of the business beyond its tangible assets, and is an important factor to consider when valuing a business for sale or purchase.
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The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ?
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The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ?.
The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ?.
Solutions for The profit and losses for the previous years are 2015 profit ₹ 10,000 2016 loss ₹ 17,000 2017 profit ₹ 17,000 2018 profit ₹ 75,000. The average capital employed in the business is ₹ 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor ₹ 6,000 p.a. Calculate the value of goodwill on the basis of 2 years purchases of super profits based on average of 3 years. ? in English & in Hindi are available as part of our courses for CA Foundation.
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