Question 11 of 64intermediate🔧 ApplyNumerical4 marks

Based on the data given in the above question, calculate goodwill by capitalisation of super profits method. Will the amount of goodwill be different if it is computed by capitalisation of average profits? Confirm your answer by numerical verification.

Correct Answer

Calculation of Goodwill by Capitalisation of Super Profits Method:

Step 1: Calculate Normal Profit Normal Profit = Capital Employed × Normal Rate of Return = Rs. 8,20,000×10000 \times 10/100 = Rs. 82,000

Step 2: Calculate Super Profit Super Profit = Average Profit – Normal Profit = Rs. 1,00,000 – Rs. 82,000 = Rs. 18,000

Step 3: Calculate Goodwill Goodwill = Super Profit × 100/Normal Rate of Return = Rs. 18,000×100000 \times 100/10 = Rs. 1,80,000

Verification by Capitalisation of Average Profits Method:

Step 1: Calculate Capitalised Value of Average Profits Capitalised Value = Average Profit × 100/Normal Rate of Return = Rs. 1,00,000×100000 \times 100/10 = Rs. 10,00,000

Step 2: Calculate Goodwill Goodwill = Capitalised Value – Net Assets = Rs. 10,00,000 – Rs. 8,20,000 = Rs. 1,80,000

Conclusion: No, the amount of goodwill will NOT be different. Both methods yield the same value of Rs. 1,80,000. This confirms that the goodwill calculated by capitalisation of super profits method is exactly the same as calculated by capitalisation of average profits method.

Exercise: Do It Yourself | Q: 3 | (Page 29)
For More Understanding

Explanation

The question requires calculating goodwill using the capitalisation of super profits method and verifying it with the capitalisation of average profits method. From the context, the data from the previous question includes: Average Profit = Rs. 1,00,000, Net Assets (Capital Employed) = Rs. 8,20,000, and Normal Rate of Return = 10%. Under the capitalisation of super profits method, goodwill is calculated by multiplying super profits by the multiplier (100/Normal Rate). Under the capitalisation of average profits method, goodwill is the difference between the capitalised value of average profits and net assets. The context explicitly states that 'The amount of goodwill worked out by this method will be exactly the same as calculated by capitalising the average profits,' which is verified numerically as both methods yield Rs. 1,80,000.

Solution Steps

  1. Step 1: Calculate Normal Profit = Rs. 8,20,000×10000 \times 10% = Rs. 82,000

  2. Step 2: Calculate Super Profit = Rs. 1,00,000 – Rs. 82,000 = Rs. 18,000

  3. Step 3: Calculate Goodwill by Super Profits Method = Rs. 18,000×100000 \times 100/10 = Rs. 1,80,000

  4. Step 4: Calculate Capitalised Value = Rs. 1,00,000×100000 \times 100/10 = Rs. 10,00,000

  5. Step 5: Calculate Goodwill by Average Profits Method = Rs. 10,00,000 – Rs. 8,20,000 = Rs. 1,80,000

  6. Step 6: Compare both values - Both equal Rs. 1,80,000, confirming they are the same

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