Capitalisation Method(practice paper)

 

Topic : Capitalisation Method

1. Give the formula of Goodwill by ‘Capitalisation of Average Profits’ Method. [1]

2. Give the formula for calculation of Goodwill by ‘Capitalisation of Super Profit’ Method. [1]

3. Why is Goodwill considered as an intangible asset but not a Fictitious Asset? [1]

4. A partnership firm earned net profits during the last three years as follows: [4]

Years                                                                                       Profit

2007-08                                                                                   38,000

 2008-09                                                                                 44,000

2009-10                                                                                  50,000  

The Capital Employed in the firm throughout the above mentioned period has been Rs.80,000.

Having regard to the risk involved, 15% is considered to be a fair return on the capital. The

remuneration of all the partners during this period is estimated to be Rs.20,000 per annum.

Calculate the value of goodwill on the basis of 

(i) Two years purchase of super profits earned on average basis during the above mentioned three years and 

(ii) Capitalization method.

5. A Business earned average profits of Rs.5,00,000 during the last few years and the normal rate of

return in similar business is 10%. Find out the value of Goodwill by

(i) Capitalization of Super Profit method and

(ii) Super Profit method, if the goodwill is valued at 3 years purchase of super profit. The assets of the business were Rs.50,00,000 and its external liabilities Rs.9,00,000.               [4]

6. Vinod and Kumar are partners in a firm. Their capitals were: Vinod Rs.6,00,000 and Kumar Rs.4,00,000. During the year 2014 the firm earned a profit of Rs.3,00,000. Calculate the value of goodwill of the firm assuming that the normal rate of return is 20%.                   [4]

7. A Business has earned average profits of Rs.2,00,000 during the last few years and the normal rate of return in a similar type of business is 10%. Ascertain the value of Goodwill by Capitalisation method. Given that the value of Net Assets of the firm is Rs.16,40,000.                         [4]

8. Larson, William and Harry are partners in a firm with the capitals of Rs.1,87,500 , Rs.1,50,000 , Rs.1,12,500. Average profit of the business for last few years is Rs.72,000. Normal rate of return in a similar business is 10%. Calculate the value of goodwill by capitalization of super profit.     [4]

                                              

Challenge : 1

From the following information, Calculate value of goodwill by capitalizing the super profit :

i) Average net capital employed in the business Rs.7,00,000.

ii) Net Trading profit of the firm for the last three years : Rs.1,47,600 ; Rs.1,48,100 ; and Rs.1,52,500.

iii) Rate of return expected from the capital having regard to the risk involved 18%.

iv) Fair remuneration to the partners for their services Rs.12,000 per annum.

v) Sundry Assets (excluding goodwill) of the firm Rs.7,54,762 ; Sundry Liabilities Rs.31,329.

Find goodwill on the basis of :

a) 3 years purchase of average profits

b) 3 years purchase of super profits

c) Capitalization of average profits

d) Capitalization of super profits

Challenge : 2

(a) The goodwill of a firm is estimated at three years purchase of the average Profits of the last five

years which are as follows:

Years                        2010                 2011                    2012                2013                    2014

Profits(Loss)           20,000             30,000                    8,000          (10,000 Loss)           12,000

(b) If in the firm total capital employed is Rs.2,00,000 and normal rate of return is 8%, the average

profit for last 5 years is Rs.24,000 and Goodwill is estimated at 3 years purchase of super

profits, remuneration to partners Rs.6,000.

(c) Vinod Brothers earn a net profit of Rs.60,000 with a capital of Rs.4,00,000. The normal rate of

return in the business is 10%. Use Capitalisation of super profits method to value the goodwill

of the firm.

   ANSWERS

1. Goodwill = Capitalised value of Average Profits – Net Assets

2. Goodwill = Super Profit x 100/Normal rate of return

3. Goodwill is an intangible fixed asset and it has a realisable value. It is not a fictitious assets

because fictitious assets cannot be realised.

4. (i) 24,000 (ii) 80,000

5. (i) Rs.9,00,000; (ii) Rs.2,70,000

6. Average Profit Rs.3,00,000; Normal Profit Rs.2,00,000: Goodwill 5,00,000

7. Capitalised value of Average Profits Rs.20,00,000; Goodwill Rs.3,60,000.

8. GoodwillRs.2,70,000

Challenge-1 : 1. Rs.4,12,200 ; 2. Rs.34,200 ; 3. Rs.39,900 ; 4. Rs.63,333

Challenge-2 : (a) Average profit Rs.12,000 and Goodwill Rs.36,000

(b) Average profit Rs.24,000; Average Actual profit 24,000 – 6,000 = 18,000; Normal

Profit Rs.16,000; Super Profit Rs.2,000 and Goodwill Rs.6,000.

(c) Normal Profit Rs.40,000; Super Profit Rs.20,000; Goodwill Rs.2,00,000.