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Goodwill

Ance Philip (Admin Exe (MBA ) IPCC 2013) (80 Points)

01 June 2012

HI,

A firm has an average profit of Rs. 60000; rate of return on capital employed is 12.5%p.a.; total captial employed in the firm was Rs. 400000. Goodwill on the basis of two year's purchase of super profit is? (explain)

Can someone explain the topic Goodwill and its calculation in Accounting?

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11 Replies

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 01 June 2012

Super Profits are the exces profits over the normal profits that can be earned.

ROCE would be 12.5% on 400000 i.e. 50000

Exces of Avg Profit over normal profits is Super Profits which comes to 10000(60000-50000)

therefore GW wud be 10000*2= Rs.20000.

1 Like

Ance Philip (Admin Exe (MBA ) IPCC 2013) (80 Points)
Replied 01 June 2012

Thank you Giridhar.

Can you explain me Goodwill and its computation in Accounting?

Thanks in advance.

chandu (student) (1051 Points)
Replied 01 June 2012

haa u can find by following.....

super profit =average profits-normnal profit

goodwill =super profit*no.of year.

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chandu (student) (1051 Points)
Replied 01 June 2012

good will is the value of reputation of a firm w.r.t profits excpeted in future on avg profits.

in every case we value the good will account which is u already studied

3methods r there in cal purpose.

so simply good will is not a ficitious asset.i thought else is u already studied in ur books.its enough

intermediate(ipc)course (no) (1460 Points)
Replied 01 June 2012

average profit = 60000

rate of return = 12.5%

capital employed = 400000

rate of return on capital employed = 400000*12.5% = 50000

super profit = 60000-50000 = 10000

goodwill 2 yr purchase of super profit = 10000*2 = 20000

ravi kumar s (student) (84 Points)
Replied 02 June 2012

goodwill is the intangible asset of the company. it will increses the status of the compnay to the outer world.

goodwill can be ascertained be many ways some of them are:

1. on the basis of average profit

2. on the basis of super profit.

3. other basis.....

your question will comes under the super profit method....

superprofit refers to the excess of actual profit over and above the average profit..

now let us solve the problem:

average profit: 12.5% of 400000 = 50000

actual profit = 60000

so the excess is 10000

and the goodwill is 10000x2= 20000

20000 is the goodwill of the company or firm..

CA. Nitin Gupta (CA) (347 Points)
Replied 03 June 2012

Computation of Goodwill is correct in all above (Rs. 20,000).

Goodwill is calculated whenever there is any change in Profit Sharing Ratio(PSR). Becoz due to such change some partners will be in gain and some partner will sacrifice future profits.

So on the basis of estimated future profit Goodwill is calculated and account settlement will be through Partner's Capital/current account.

This Goodwill is only computed but not recorded in books becoz as per AS 10 onlu purchased goodwill can be recorded in the books.

koustav de (student) (26 Points)
Replied 15 June 2012

2007-profit RS.50000

08-loss 20000(including loss by fire 30000)

09-profit 70000(including insurance claim rs.18000 nd int on investment nd dividends 8000)

calculate the value f goodwill.........ans is 66,000

Tejaswi Kasturi (student-cpt) (427 Points)
Replied 15 June 2012

@ koustav de:The goodwill is calculated on the basis of x no. of years purchase of avg profits of three years. ( the number with which we multiply the avg. profits is the no. of years of purchase of goodwill, i.e. the number of years the goodwill will help the firm).

avg. profit for last three years = (50,000 - 20,000 + 70,000)/3 = (30,000 + 70,000)/3 = 1,00,000/3 = 33,333.33 if we assume two years purchase of goodwill, the goodwill will be 2*33,333.33 = 66,666.666. I don't think it will be 66,000

all the losses and income shown in brackets must be included for calculation of avg. profits