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A firm having assets of 400000 and liabilities of 168000 earns the annual profit of 36000.the rate of return being 12%.calculate the amount of goodwill by captilisation of super profit method.?
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A firm having assets of 400000 and liabilities of 168000 earns the ann...
Calculation of Goodwill by Capitalization of Super Profit Method
Given information:
- Assets of the firm = $400,000
- Liabilities of the firm = $168,000
- Annual profit = $36,000
- Rate of return = 12%
To calculate the amount of goodwill using the capitalization of super profit method, we need to follow the following steps:
Step 1: Calculate the Normal Profit
Normal profit refers to the return on investment that is considered reasonable for the industry. It is calculated by multiplying the rate of return with the capital employed.
Normal Profit = Capital Employed × Rate of Return
Capital Employed = Assets - Liabilities
= $400,000 - $168,000
= $232,000
Rate of Return = 12%
Normal Profit = $232,000 × 0.12
= $27,840
Step 2: Calculate the Super Profit
Super profit is the excess profit earned by the firm over the normal profit. It is calculated by subtracting the normal profit from the annual profit.
Super Profit = Annual Profit - Normal Profit
= $36,000 - $27,840
= $8,160
Step 3: Determine the Value of Goodwill
Goodwill is calculated by capitalizing the super profit at an appropriate rate.
Goodwill = Super Profit / Rate of Return
Goodwill = $8,160 / 0.12
= $68,000
Therefore, the amount of goodwill by capitalization of the super profit method is $68,000.
Explanation:
The capitalization of super profit method is a common approach to calculate the value of goodwill. It takes into account the excess profit earned by a firm over the normal profit that is expected in the industry. This excess profit is known as super profit.
In this method, the normal profit is calculated by multiplying the rate of return with the capital employed. The capital employed is the difference between the total assets and liabilities of the firm.
Once the normal profit is determined, the super profit is calculated by subtracting the normal profit from the annual profit. This represents the excess profit that is attributable to factors such as brand value, customer loyalty, efficient management, etc.
Finally, the value of goodwill is determined by capitalizing the super profit at an appropriate rate. The rate of return is used to determine the present value of the super profit, as it represents the expected return on investment.
In the given example, the normal profit is calculated to be $27,840, and the super profit is $8,160. By dividing the super profit by the rate of return of 12%, we find that the amount of goodwill is $68,000.
The capitalization of super profit method provides a useful way to quantify the value of goodwill and assess the financial strength and attractiveness of a business.
Given information:
- Assets of the firm = $400,000
- Liabilities of the firm = $168,000
- Annual profit = $36,000
- Rate of return = 12%
To calculate the amount of goodwill using the capitalization of super profit method, we need to follow the following steps:
Step 1: Calculate the Normal Profit
Normal profit refers to the return on investment that is considered reasonable for the industry. It is calculated by multiplying the rate of return with the capital employed.
Normal Profit = Capital Employed × Rate of Return
Capital Employed = Assets - Liabilities
= $400,000 - $168,000
= $232,000
Rate of Return = 12%
Normal Profit = $232,000 × 0.12
= $27,840
Step 2: Calculate the Super Profit
Super profit is the excess profit earned by the firm over the normal profit. It is calculated by subtracting the normal profit from the annual profit.
Super Profit = Annual Profit - Normal Profit
= $36,000 - $27,840
= $8,160
Step 3: Determine the Value of Goodwill
Goodwill is calculated by capitalizing the super profit at an appropriate rate.
Goodwill = Super Profit / Rate of Return
Goodwill = $8,160 / 0.12
= $68,000
Therefore, the amount of goodwill by capitalization of the super profit method is $68,000.
Explanation:
The capitalization of super profit method is a common approach to calculate the value of goodwill. It takes into account the excess profit earned by a firm over the normal profit that is expected in the industry. This excess profit is known as super profit.
In this method, the normal profit is calculated by multiplying the rate of return with the capital employed. The capital employed is the difference between the total assets and liabilities of the firm.
Once the normal profit is determined, the super profit is calculated by subtracting the normal profit from the annual profit. This represents the excess profit that is attributable to factors such as brand value, customer loyalty, efficient management, etc.
Finally, the value of goodwill is determined by capitalizing the super profit at an appropriate rate. The rate of return is used to determine the present value of the super profit, as it represents the expected return on investment.
In the given example, the normal profit is calculated to be $27,840, and the super profit is $8,160. By dividing the super profit by the rate of return of 12%, we find that the amount of goodwill is $68,000.
The capitalization of super profit method provides a useful way to quantify the value of goodwill and assess the financial strength and attractiveness of a business.
Community Answer
A firm having assets of 400000 and liabilities of 168000 earns the ann...
Goodwill = ₹ 68000
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A firm having assets of 400000 and liabilities of 168000 earns the annual profit of 36000.the rate of return being 12%.calculate the amount of goodwill by captilisation of super profit method.?
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A firm having assets of 400000 and liabilities of 168000 earns the annual profit of 36000.the rate of return being 12%.calculate the amount of goodwill by captilisation of super profit method.? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about A firm having assets of 400000 and liabilities of 168000 earns the annual profit of 36000.the rate of return being 12%.calculate the amount of goodwill by captilisation of super profit method.? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A firm having assets of 400000 and liabilities of 168000 earns the annual profit of 36000.the rate of return being 12%.calculate the amount of goodwill by captilisation of super profit method.?.
A firm having assets of 400000 and liabilities of 168000 earns the annual profit of 36000.the rate of return being 12%.calculate the amount of goodwill by captilisation of super profit method.? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about A firm having assets of 400000 and liabilities of 168000 earns the annual profit of 36000.the rate of return being 12%.calculate the amount of goodwill by captilisation of super profit method.? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A firm having assets of 400000 and liabilities of 168000 earns the annual profit of 36000.the rate of return being 12%.calculate the amount of goodwill by captilisation of super profit method.?.
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