Super Profit Method(practice paper)

Topic : Super Profit Method

 1. What is meant by Super Profit Method? [1]

2. What are the four steps involved in calculating goodwill through Super Profit? [1]

3. If the amount of super profit is negative, what does it indicate? [1]

4. Differentiate between Average Profit Method and Super Profit Method [3]

5. The books of a business firm showed that the capital employed on 31 December 2013 was

Rs.10,00,000 and the profits for the last five years were:

2010 Rs.80,000

2011 Rs.1,00,000

2012 Rs.1,10,000

2013 Rs.1,40,000

2014 Rs.1,70,000

You are required to find out the value of goodwill based on 3 years purchase of the super

profits of the business. Given that the normal rate of return is 10%.           [3]

6. The books of a business firm showed that the capital employed on 31 December 2013 was

Rs.20,00,000 and the profits for the last five years were:

2010 Rs.2,60,000

2011 Rs.2,80,000

2012 Rs.2,70,000

2013 Rs.2,50,000

2014 Rs.2,10,000

You are required to find out the value of goodwill based on 3 years purchase of the super profits of the business. Given that the normal rate of return is 10%.              [3]

7. The Capital employed in a business is Rs.50,000. The average net profits of business is

Rs.9,000. The Normal Rate of return on capital employed is 10%. The remuneration of the

partners is estimated to be Rs.1,500 per annum. Calculate the value of goodwill on the    [3]

basis of 4 years purchase of super profits.

8. A and B are partners in a firm sharing profits in the ratio of 2 : 1. Their capitals are Rs.2,00,000 and Rs.1,50,000. Normal rate or return on the capital employed is 10%. Both partners will get annual salary of Rs.25,000 each. Profits of firm are :   [3]

Year Profit/Loss

2008

2009

2010

75,000 Profit

90,000 Profit

1,20,000 Profit

Calculate the value of goodwill on the basis of 2 years purchase of super profits.

Accountancy Challenge

                                                                        Challenge : 1

The capital of the firm of Vinod and Kumar is Rs.2,00,000 and the market rate of interest is 15%.

Annual Salary to partners is Rs.12,000 each. The profits for the last 3 years were Rs.60,000; Rs.72,000

and Rs.84,000. Goodwill is to be valued at 2 years purchase of the last 3 years average super profits.

Calculate the goodwill of the firm.

                                                                        Challenge : 2

On April 1st , 1998 an existing firm had assets of Rs.3,00,000 including cash of Rs.20,000. The partners capital accounts showed a balance of Rs.2,40,000 and reserves constituted the rest. If the normal rate of return is 20% and the goodwill of the firm is valued at Rs.96,000 at 4 years purchase of super profits, find the average profits of the firm.

                                                                    Challenge : 3

Vinod and Kumar were sharing profits in the ratio of 3:2. They decided to admit Swami into the partnership for

1/6th share of the future profits. Goodwill, valued at 4 times the average super profits of the firm, was Rs.36,000.

The firm had assets worth Rs.30 Lakhs and liabilities Rs.24 Lakhs. The normal earning capacity of such firms is

expected to be 10% p.a. find the average profits/actual profits earned by the firm during the last 4 years.

                                                                            ANSWERS

1. Super profit is the excess of average profit over normal profit. In simple words, if actual profits

of a business firm are more than the normal profits, the difference is called super profit.

2. (i) Calculate Average Profit (ii) Calculate Normal profit (iii) Calculate Super Profit i.e. Average

profit – Normal profit (iv) Calculate goodwill by multiplying the super profits by the given

number of years purchase.

3. If the amount of Super Profit is negative, it indicates that there is no goodwill of the firm.

4. Difference Between Average Profit Method and Super Profit Method

Basis of

difference

Average Profit Method Super Profit Method

Meaning Profits of previous years are totalled

up which are divided by the number of

years.

Super Profit is the excess of average

profit over normal profit.

Formula Average Profit x No. of years purchase Super profit x No. of years purchase

5. Average profit Rs.1,20,000; Super profit Rs.20,000; Goodwill Rs.60,000

6. Average Profit Rs.2,54,000; Super Profit Rs.54,000; Goodwill Rs.1,62,000

7. Super Profit Rs.2,500 and Goodwill Rs.10,000

8. Super Profit Rs.10,000 and Goodwill Rs.20,000

Challenge-1 : Average Profit Rs.72,000; Normal Profit Rs.54,000; Super Profit Rs.18,000; Goodwill

Rs.36,000

Challenge-2 : Normal Profit Rs.60,000; Goodwill Rs.96,000; Super Profit Rs.24,000; Average Profit

Rs.84,000.

Challenge–3: Average profits Rs.69,000