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2-Methods of Calculating Goodwill

The document outlines various methods for calculating goodwill, including the average profit method, super profit method, and capitalization method. It provides formulas and examples for each method, detailing how to compute goodwill based on average profits, super profits, and capitalized values. Solutions to specific problems are also included to illustrate the application of these methods.

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rayyanroshan09
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13 views2 pages

2-Methods of Calculating Goodwill

The document outlines various methods for calculating goodwill, including the average profit method, super profit method, and capitalization method. It provides formulas and examples for each method, detailing how to compute goodwill based on average profits, super profits, and capitalized values. Solutions to specific problems are also included to illustrate the application of these methods.

Uploaded by

rayyanroshan09
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Montfort School, Roorkee

Methods of calculating goodwill

1. Average profit method


a. Simple average profit method-
As per average profit method,
Goodwill = average profits × no. of years purchase
● Average profit = sum total of profits of all years / total number of years

Questions:
i. Profits of a firm for last four years were Rs 100,000, Rs 150,000, Rs 50, 000 and Rs
100,000 respectively. Find out the goodwill of the firm if number of years purchase is
2 years.
ii. Profits of a firm for were as follows 2016 - Rs 75000, 2017 - Rs 50,000, 2018 - Rs
100,000 and losses in 2019 - Rs 25000. Find out the value of goodwill if number of
years purchase is 3 years.
Solutions: i. Rs 200,000, ii. Rs 150,000

b. Weighted average profit method-


Goodwill = weighted average profits x no. of years purchase
 Weighted average profits = Total product of profits/Total weight

Questions:
i. Profits of a firm for the year ended 31st March for last two years were as 2018- Rs
12000, 2019 – Rs 14,400. Find out the value of goodwill on the basis of 3 years
purchase of weighted average profits of last two years assuming weight of 1 and 2
assigned to 2018 and 2019 respectively.
Solutions: i. Rs 40,800

2. Super profit method


As per super profit method,
Goodwill = super profits × no. of years purchase
● Super profit = average or actual profits - normal profits
● Normal profit = capital employed × normal rate of return / 100

Questions:
i. Profits of a Manoj Ltd for last four years were Rs 75000, Rs 125000, Rs 60000 and Rs 40,000
respectively. Capital employed by Manoj Ltd was Rs 200000. Normal rate of return in the
industry 12% pa. Find out the value of goodwill on the basis of super profit method.
ii. Assets and liabilities of a firm were Rs 200,000 and Rs 50,000 respectively. Actual profits of the
firm were Rs 75000. Normal rate of return in the industry 20 % p.a. Find out the value of
goodwill using super profit method if number of years purchase is 3 years.
Solutions: i. Rs 51,000, ii. Rs 135000
3. Capitalisation method
a. Capitalisation of average profits method:

Prepared by Arun Arora


Goodwill = capitalised value of average profits - capital employed
 Capitalised value of average profits = average profits × 100/normal rate of
return

Questions:
i. Profits of Akhil Ltd were as follows 2017- Rs 25000, 2018- Rs 17500 and 2019
- Rs 2500. Assets and Liabilities of a firm were Rs 75000 and Rs 15000
respectively. Normal rate of return 20 percent per annum. Find out value of
goodwill using capitalisation of average profits method.

ii. Profits of a Manoj Ltd for last four years were Rs 75000, Rs 125000, Rs 60000
and Rs 40,000 respectively. Capital employed by Manoj Ltd was Rs 200000.
Normal rate of return in the industry 12% pa. Find out the value of goodwill
on the basis of capitalisation of average profit method.

Solutions: i. Rs 15000, ii. Rs 425000

b. Capitalisation of super profits method:


Goodwill = super profits × 100/normal rate of return

Questions:
i. Profits of Akhil Ltd were as follows 2017- Rs 25000, 2018- Rs 17500 and 2019 - Rs 2500. Assets
and Liabilities of a firm were Rs 75000 and Rs 15000 respectively. Normal rate of return 20
percent per annum. Find out value of goodwill using capitalisation of super profits method.
ii. Capital employed by a firm Rs 250000. Normal rate of return 10 % p.a. Actual profits of firm
were Rs 35,000. Find out the value of goodwill using capitalisation of super profits method.

Solutions: i. Rs 15000, ii. Rs 100,000

Prepared by Arun Arora

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