A firm has received a profit during the last four years RS9000,RS9000,RS11000,RS17000 respectively the firm has capital investment of RS50000. A firm rate of return on investment is 15% p. a calculate goodwill by capitalisation of super profit method and capitalisation of Average profit method

Question

Answer

Calculation of Goodwill by Capitalisation of Super Profit Method and Capitalisation of Average Profit Method

Given Data

Profit in the last four years: RS9000,RS9000,RS11000,RS17000

Capital investment: RS50000

Rate of return on investment: 15% p.a.

Calculation of Super Profit

Super profit is the difference between actual profit and normal profit. Normal profit is the profit that can be earned by investing in a similar business with the same level of risk. The formula for super profit is:

Super profit = Actual profit - Normal profit

First, we need to calculate the normal profit using the formula:

Normal profit = Capital investment x Rate of return

Normal profit = RS50000 x 15% = RS7500

Now, we can calculate the super profit for each year:

Super profit for year 1 = RS9000 - RS7500 = RS1500

Super profit for year 2 = RS9000 - RS7500 = RS1500

Super profit for year 3 = RS11000 - RS7500 = RS3500

Super profit for year 4 = RS17000 - RS7500 = RS9500

The total super profit for four years is:

Total super profit = RS1500 + RS1500 + RS3500 + RS9500 = RS16000

Capitalisation of Super Profit Method

The formula for calculating goodwill using the capitalisation of super profit method is:

Goodwill = Super profit x Capitalisation rate

The capitalisation rate is the rate at which the super profit is capitalised or converted into goodwill. It is calculated using the formula:

Capitalisation rate = Expected rate of return - Rate of return

The expected rate of return is the rate of return that a buyer would expect from the investment. It is usually based on the risk involved in the business and the prevailing market conditions. Let's assume that the expected rate of return is 20%.

The capitalisation rate is:

Capitalisation rate = 20% - 15% = 5%

Now, we can calculate the goodwill using the formula:

Goodwill = RS16000 x 5% = RS800

Capitalisation of Average Profit Method

The formula for calculating goodwill using the capitalisation of average profit method is:

Goodwill = Average profit x Capitalisation years x Capitalisation rate

The average profit is calculated using the formula:

Average profit = Total profit / Number of years

The total profit for four years is:

Total profit =

Answer

(i) 26667 (I)26667

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