Goodwill

APS ACADEMY
 Topics to Study
1. Introduction to Goodwill

2. Methods of Valuation of Goodwill

 What is Goodwill?
 Goodwill is an intangible asset which places an
enterprise at an advantageous position due to which
the enterprise is able to earn higher profits without
putting extra efforts.
 Features of Goodwill
1. Goodwill is an intangible asset

2. Goodwill is not a fictitious asset

3. Value of goodwill is a subjective assessment

 Classification of Goodwill
 There are two types of goodwill:

1. Purchased goodwill: it is the goodwill, which is

acquired by a firm (included in B/S).

2. Self-generated goodwill: this is not purchased from

some other firm, but created through the efforts of
the firm (excluded from B/S).

Supplier with goodwill was Raju (company was worth

Rs. 10 crore, and suppose Raju’s goodwill was Rs. 50
lakh)
 Purchased v Self-
Generated Goodwill
Purchased goodwill Self-generated goodwill
 It is an asset in balance sheet  It is not recorded in the
books.
 It is amortized within 10
years (according to AS-26)
 Which goodwill is present
in books?
 Purchased goodwill is mentioned in the books.

 Self-generated goodwill is valued outside the balance

sheet separately.
 Need for Valuing Goodwill
Goodwill is calculated in these cases:

1. Change in profit-sharing ratio among partners

2. New partner being admitted

3. When a partner retires or dies

4. When firm is sold

5. When two or more firms amalgamate

6. When a partnership firm is converted into company

 Factors affecting value of
goodwill
1. Quality and efficiency of management

2. Favourable location

3. Longer establishment of business

4. Advantage of patents

5. Market situation

6. Past performance

7. Quality of product
 Topics to Study
1. Introduction to Goodwill

2. Methods of Valuation of Goodwill

 Valuation of Goodwill
 There are three methods for valuation of goodwill:

1. Average profit method (including weighted average)

2. Super profit method

3. Capitalization method
 Average Profit Method
 Goodwill = average profits × number of years purchase

Number of years’ purchase is the number of years for which

the firm is likely to earn same amount of profit after change of
ownership because of past efforts.

Average profits is the average of the profits of the past few

years.

Suppose the profits for last 3 years are 10000; 12000 and 26000.

The average profit will be (10000+12000+26000)/3 = 16,000

 Average Profit Method
 There are 4 steps involved:

1. Calculate normal business profit

2. Find average profit (using normal business profit)

3. Determine the number of years’ purchase

4. Find value of goodwill

 Example
 Goodwill is to be valued at three years’ purchase of four
years’ average profit. Profits for last four years ending on
31st March of the firm were:

2016 – 12,000

2017 – 18,000

2018 – 16,000

2019 – 14,000

Calculate amount of Goodwill.

 Example contd.
2016 – 12,000

2017 – 18,000

2018 – 16,000

2019 – 14,000
 Goodwill = Average Profits * no. of years’ purchase

Average profit = (12000 + 18000 + 16000 + 14000)/4 = 15,000

 Goodwill = 15,000 * 3 = 45,000

 Example
 Calculate value of goodwill on the basis on three years’
purchase of average profit of the preceding five years:

2014-15: 13,00,000

2015-16: 4,00,000 (loss)

2016-17: 18,00,000

2017-18: 15,00,000

2018-19: 8,00,000
 Calculating Normal
Business Profit
 Normal business profit = profit for the year (given) +
abnormal losses – abnormal gains.
Abnormal Losses Abnormal Gains
1. Loss by fire, theft
1. Gain on Sale of fixed assets
2. Loss on sale of fixed asset (since it is
2. Income from non-trade investments
not a normal business activity)
3. Expenses not expected again in future 3. Any future expense, like insurance premium

4. Capital expenditure wrongly debited 4. Overvaluation of closing stock or

to revenue expenditure.
5. Overvaluation of opening stock or
undervaluation of closing stock (since
both would reduce the profit).
6. Voluntary Retirement Compensation
undervaluation of opening stock.
5. non-recurring incomes, such as those not
expected in future.
6. partner’s remuneration, if it is not deducted.
 Overvaluation of Opening
Stock
 In a trading account, opening stock and gross profit are
both on debit side. So, overvaluing opening stock will
decrease the balancing figure (profit).
Particulars Amount Particulars Amount
To Opening Stock By Sales
Less: sales returns
To Purchases By Closing Stock
Less: purchase returns
To Direct Expenses
To Gross Profit
Undervaluation of Closing
Stock
 In a similar manner, undervaluation of closing stock
reduces the net profit.
Particulars Amount Particulars Amount
To Opening Stock By Sales
Less: sales returns
To Purchases By Closing Stock
Less: purchase returns
To Direct Expenses
To Gross Profit (balance) By Gross loss (balance)
 Undervalued Closing Stock
being carried over
 Suppose the closing stock for 2016-17 was undervalued by
10,000.
 We will add 10,000 to the given profit (of 2016-17) to get
the adjusted profits.
 It also means that the opening stock of next year (2017-18)
will be also be undervalued by 10,000.
 So, we will subtract 10,000 from next year’s profits to get
the adjusted profits.
 Example
 Goodwill is to be valued three years’ purchase of average
normal profit of the last four years. Year Profit
2015-16 90,000
 The profits of last four years are given: 2016-17 160,000
2017-18 180,000
Additional information:
2018-19 220,000

i. During 2015-16, an asset was sold at a gain of 10,000.

ii. During 2016-17, a machine was destroyed in accident

and 30,000 was written off as loss in P&L Account.
 Example contd.
iii. During 2017-18, firm’s assets were not insured due to
oversight. Insurance premium being Rs. 10,000.

Determine the goodwill of the firm.

 Example contd.
i. During 2015-16, an asset was sold at a gain of 10,000
ii. During 2016-17, a machine was destroyed in accident
and 30,000 was written off as loss in P&L Account.
iii. During 2017-18, firm’s assets were not insured due to
oversight. Insurance premium being Rs. 10,000.
Year Profit Adjustment Normal Profit
2015-16 90,000 (10,000) 80,000
2016-17 160,000 30,000 190,000
2017-18 180,000 (10,000) 170,000
2018-19 220,000 220,000
 Example contd.
 Average profits = (80,000 + 190,000 + 170,000 + 220,000)/4

= 165,000

Goodwill = average profits × number of years purchase

= 165,000 × number of years purchase

= 165,000 × 3

= 495,000
 Example
 Find the goodwill at three years’ purchase on the basis
of average profit of past 5 years.
Year Profit

The profits for the years are given: 2014-15 180,000

2015-16 160,000
Additional information: 2016-17 250,000
2017-18 300,000
i. Abnormal gain of 20,000 was earned in
2018-19 350,000
2015-16.

ii. An abnormal loss of 10,000 was incurred in the 2016-

17.
 Example contd.
iii. Expense of 50,000 incurred to overhaul a machine on
1/4/2017 was debited to P&L A/c instead of being
debited to Machinery Account. Depreciation is
charged on machinery @20% on written down value
method.

iv. Closing stock as on 31st March 2018 was undervalued

by 20,000.
 Example contd.
i. Abnormal gain of 20,000 was earned in 2015-16

ii. An abnormal loss of 10,000 was incurred in the 2016-17

Year Profit Adjustment Normal Profit
2014-15 180,000
2015-16 160,000 (20,000) 140,000
2016-17 250,000 10,000 260,000
2017-18 300,000
2018-19 350,000
 Example contd.
iii. Expense of 50,000 incurred to overhaul a machine on
1/4/2017 was debited to P&L A/c instead of being debited
to Machinery Account. Depreciation is charged on
machinery @20% on written down value method.
iv. Closing stock as on 31st March 2018 undervalued by 20,000.
Year Profit Adjustment Normal Pr.
2014-15 180,000 180,000
2015-16 160,000 (20,000) 140,000
2016-17 250,000 10,000 260,000
2017-18 300,000 50,000+20,000 (underval cl. stock) –20% of 50,000 = 60,000 360,000
2018-19 350,000 –20,000 (undervalued op. stock) – 20% of 40,000 = (28,000) 322,000
 Example contd.
 average profits = (180,000 + 140,000 + 260,000 + 360,000 +
322,000)/5

= 256,400

Years of purchase = 3 years

So, valuation of goodwill = 3×256,400

= 769,200
 Learning from Previous
Example
 Often we debit expenses on machines to revenue expenditure.

 Profit = 500,000

Suppose the capital expenditure on machine was Rs. 200,000.

 Our profit would have been 5 + 2 lakh = 7 lakh

However, we also need to subtract the depreciation, not just for

this year, but also for next few years.

This year: 10% of 2 lakh = 20,000; Normal profit = 7lakh - 20000

next year: 10% of 1.8 lakh = 18000; next year 18,000 is subtracted.
 Example
 Find the goodwill valued at four years’ purchase of
average profit of last five years. Year Profit/loss

 Profit for the past five years were: 2014-15 30,000

 On 1st April 2018, 5 cycles costing 20,000 2015-16 were

70,000

purchased and were wrongly debited

2016-17 100,000
to travelling expenses.
2017-18 140,000
 Depreciation on cycles is 25%.
2018-19 (120,000)
 Example contd.
The additional information given is:
 On 1st April 2018, 5 cycles costing 20,000 were purchased and
were wrongly debited to travelling expenses.
 Depreciation on cycles is 25%

Only the year 2018-19 is affected, because we have wrongly

debited capital expenditure as revenue expenditure.

So, we add 20,000 to the loss of 120,000 to get a loss of 100,000.

However, there is additional loss of 25% depreciation on 20,000,

which means the net loss is 105,000.
 Example contd.
 Average profit = (30,000 + 70,000 + Year Adjusted
profit/loss
100,000 + 140,000 – 105,000)/5 2014-15 30,000
2015-16 70,000
= 47,000
2016-17 100,000
Years of purchase = 4 years 2017-18 140,000
2018-19 (105,000)
Therefore, goodwill = 47000 × 4

= 188,000
 Interest on Non-Trade
Investment is not considered
 Suppose profit is given as 75,000 including interest
of Rs. 15,000 from non-trade investment.
 For calculating goodwill, we consider profit as
60,000 because interest on non-trade investment is
not an income from the business.
 Weighted Average Profit
Method
 According to this method, weight is assigned to each
year.
 Normal business profit for each year is multiplied
with the assigned weight to determine the total value
of weighted profit.
 Total value of weighted profit is divided by total
weights to get the weighted average profit method.
 Giving Weights
 4 years profit

2020-21: 30,000  4

2019-20: 20,000  3

2018-19: 25,000  2

2017-18: 15,000  1

Average profit using weighted average method

 Example
 Profits of a firm for the last five years were: Year Profit

2014-15 40,000
 Calculate value of goodwill on the basis of
2015-16 48,000
three years’ purchase of the weighted
2016-17 60,000
average profit after assigning weights 1, 2,
3, 4, 5 respectively to the profits for years 2017-18 50,000

2014-15, 2015-16, 2016-17, 2017-18, 2018-19. 2018-19 36,000

 Example contd.
 The more recent years are Year profit Weight Weighted
profit
given more weight.
2014-15 40,000 1 40,000
 Weighted Average Profit =
2015-16 48,000 2 96,000
696,000/15 = 46,400
2016-17 60,000 3 180,000
 Goodwill = 46,400 × 3 2017-18 50,000 4 200,000

= 139,200 2018-19 36,000 5 180,000

Total 15 696,000
 Example
 Calculate goodwill of the firm on the basis of three
years’ purchase of the weighted average profit of the
last four years.
Year Profit
 Profits of the years were: 2015-16 40,400

 There is additional information: 2016-17 49,600

2017-18 40,000

2018-19 60,000
 Example contd.
i. On 31st March 2018, a major plant was undertaken for
Rs. 12,000 which was charged as revenue expenditure.
The said sum is to be capitalized for goodwill
calculation subject to adjustment of depreciation of
10% p.a. on reducing balance method.

ii. The closing stock for 2016-17 was overvalued by 4,800.

iii. To cover management cost an annual charge of 9,600

should be made for the purpose of goodwill valuation.
 Example contd.
Calculating Adjusted Profit

Particulars 2015-16 2016-17 2017-18 2018-19

Given Profits 40,400 49,600 40,000 60,000
(–)annual management cost 9600 9600 9600 9600
(+)capital expenditure on plant 12000
(–)depreciation 1200
(–)overvaluation of closing stock 4800
(+)overvaluation of opening stock 4800
Adjusted Profits 30,800 35,200 47,200 49,200
 Example contd.
Year profit weights Weighted profit
2015-16 30,800 1 30,800
2016-17 35,200 2 70,400
2017-18 47,200 3 141,600
2018-19 49,200 4 196,800
Total 10 439600
 Weighted average profit = total weighted profit/total
weights

= 439,600/10 = 43960

So, Goodwill = 43960 × 3 = 131,880

 Super Profits Method
 What is super profit?

Suppose we have invested Rs. 10 lakh in a business and normally

we expect 10% return. Steel firm set up.

So, normal profit = 10% of 10 lakh = 1 lakh

Suppose actual profit (or average profit) comes out Rs. 1.2 lakh.

Then super profit is that extra Rs. 0.2 lakh over the normal profit.

Using this super profit, we calculate the goodwill, because we

assume that this extra profit is only due to the goodwill.
 Super Profits Method
 According to super profits method:

Goodwill = Super Profits × No. of years purchase

Super Profits = Average Profits – Normal Profits

Normal Profits = Average capital employed × (Rate of Return/100)

NRR is the normal rate of return

NYP is no. of years purchase

Average capital employed = (opening capital + closing capital)/2

 Super Profits Method
 Capital employed has two sides:

1. Liabilities side approach:

 Capital employed = capital + reserves – goodwill – fictitious asset
– non-trade investments.

2. Asset side approach:

 Capital employed = Total assets (except goodwill, non trade
investments and fictitious assets) – outside liabilities.

Outside liability  loan, creditors, bills payable

Assets – outside liabilities = capital employed

 Which items are excluded
from Capital Employed?
 We saw two formulae for capital employed:

 capital + reserves – goodwill – fictitious asset – non trade

investments
 total assets (except goodwill, non trade investments and
fictitious assets) – outside liabilities

So, there are 3 items excluded:

1. Goodwill
Why are they excluded?
2. Fictitious assets
3. Non trade investments
Why are Goodwill, Fictitious Assets
& Non-trade investment excluded?
 Fictitious Assets: we know that profits generated by the
business are its liability, because profits are to be distributed
to the owners.

Similarly, losses (such as fictitious assets) are an asset for the

business, because it is pushed to the owner.

However, when we talk about capital employed by the owner,

the owner spends to acquire assets such as machinery and
building, but not for fictitious assets.

Similarly, goodwill and non-trade investments are also

 Investments
 Trade investment: investment made to continue a
business, e.g., security deposits are made with a
company to acquire its dealership.
 Non-trade investment: investment made to earn
income, e.g., investment in shares, debentures etc.
 Example
 A firm earned net profits during the last three years:

Year 1 2 3
Profits 18,000 20,000 22,000

 The capital investment of the firm is Rs. 60,000.

 Normal return on capital is 10%.

 Calculate value of goodwill on the basis of three years’

purchase of the average super profit for the last three
years.
 Example contd.
 Average profit = 20,000

Year 1 2 3
Profits 18,000 20,000 22,000

 Normal profit = 10% of 60,000 = 6,000

 Super profit = 20,000 – 6,000 = 14,000

 Goodwill = 14,000 × 3 = 42,000

 Example
 Alok and Vedant are partners in M/s Mega Enterprises. They
admit their Fufaji as partner w.e.f. 1st April 2019.
 They value goodwill at 3 years’ purchase by Super Profit
Method for which they take average of last 5 years.

 Capital employed in firm is Rs. 15,00,000 and normal return in

similar business is 10%. Calculate goodwill.
Year 2014-15 2015-16 2016-17 2017-18 2018-19
Profit 200,000 170,000 210,000 230,000 250,000

 2014-15 includes gain of 25,000 from sale of asset and 2015-16

includes abnormal loss of 50,000.
 Example contd.
 First we calculate normal profits:
Year 2014-15 2015-16 2016-17 2017-18 2018-19
Profit 200,000 170,000 210,000 230,000 250,000
Normal profit 175,000 220,000 210,000 230,000 250,000

 Average profit = 1,085,000/5 = 217,000

Normal profit = 10% of 1,500,000 = 150,000

 Super profit = 67,000

 Goodwill = 67,000 * 3 = 201,000

 Example
 On 1/4/2018, a firm had assets of 120,000 and outside
liabilities are 10,000.
 If the NRR = 8% and the goodwill of the firm is 60,000
at four years’ purchase of super profit, find the actual
profits of the firm.
 Example contd.
 We know that Goodwill = Super Profit × NYP

 60,000 = Super Profit × 4

 Super Profit = 15,000

i.e., Average Profit – Normal Profit = 15,000 —(1)

Normal Profit = 8% of capital employed = 8% of 110,000

i.e., Normal Profits = 8,800 —(2)

From (1) and (2), average profit = 23,800

 Example
 M/s Hi-Tech India has assets of 500,000 whereas
liabilities are: Partners’ Capitals – Rs. 350,000; General
Reserve – Rs. 60,000 and Sundry Creditors – Rs.
90,000.
 If the normal rate of return is 10% and goodwill of the
firm is valued at 90,000 at 2 years’ purchase of super
profit, find average profit of the firm.
 Example contd.
 Goodwill = super profit × no. of years’ purchase

 Goodwill = super profit × 2

 90,000 = super profit × 2

 Super profit = 45,000

Now, we need to calculate average profits of the firm.

Average profits = normal profits + super profits

For normal profits, we can use the formula:

 Example contd.
 Capital employed = assets – outside liabilities

= 500,000 – 90,000

= 410,000

 Normal profits = 10% of 410,000

= 41,000

Therefore, average profits = normal profit + super profit

41,000 + 45,000 = 86,000

 Example
 On 1st April 2018, a firm had assets Rs. 300,000,
including cash of Rs. 5,000.
 If the normal rate of return is 10% and the goodwill
of the firm is valued at Rs. 200,000 at four years
purchase of super profit.
 Find the average profit of the firm.
 Example contd.
 Super Profit = Rs. 50,000

Normal profit = Rs. 30,000

=> Average Profit = Rs. 80,000

 Capitalization Method
 Under capitalization method, goodwill can be valued
using two methods:

i. Capitalization of average profit

ii. Capitalization of super profit

 Capitalization Method
 What is capitalization method and how do we calculate
goodwill using capitalization method?

Suppose we have employed capital of Rs. 1 lakh in a business,

and the average rate of return is say 15%.

However, we see that our average profit is Rs. 30,000.

So, if we had no goodwill, our normal profit would have been

15% of 1 lakh = Rs. 15,000.

However, the average profit is double of 15,000 i.e., Rs. 30,000.

 Capitalization Method
 We know that 15% of 2 lakh is Rs. 30,000.

 So, our return comes as if we had invested not Rs. 1 lakh,

but Rs. 2 lakh in our business.

This is because of the additional goodwill worth Rs. 1 lakh

that is giving us that extra profit.

This is the concept of capitalization method.

We derive the capitalized value of business (Rs. 2 lakh in

this example) and subtract the actual capital employed to
Capitalization of average profit
 Goodwill = capitalized value of business – net assets

Same as capital
 CV = average profits × (100/NRR) employed

Logic for this formula: CV × (NRR/100) = Avg. Profits

*CV stands for capitalized value

C.V. of business = goodwill + net assets

 Example
 A firm earned Rs. 60,000 as profit, the normal rate of
return being 10%.
 Assets of the firm are 720,000 (Excluding goodwill)
and liabilities are 240,000.
 Find the value of goodwill by capitalisation of
average profit method.
 Example Contd.
 GW = 120,000
 Example
 Puneet and Tarun are in restaurant business having credit
balance in their fixed capital accounts as 2,50,000 each.
 They have credit balances in their current accounts of Rs.
30,000 and 20,000 respectively.
 The firm does not have any liability.

 They are regularly earning profits and their average profit of

last 5 years is 100,000.
 If the NRR is 10%, find the goodwill by capitalization of
average profit method.
 Example contd.
 Goodwill = capitalized value of business – net assets

 Capitalized value of business = average profits ×

(100/NRR) = 100,000 × 10 = 10,00,000
 Capital employed (same as net assets) = 2,50,000 +
2,50,000 + 30,000 + 20,000 = 5,50,000

Therefore, goodwill = 10,00,000 – 5,50,000 = 4,50,000

 Example
 Bharat and Bhushan are partners in a retail business.
Balances in capital and current accounts on 31st March
2019 were:
Capital A/c Current A/c
Bharat 200,000 50,000
Bhushan 240,000 10,000 (Dr.)

 The firm earned an average profit of Rs. 90,000.

 If the NRR is 10%, find the value of goodwill.

 Example contd.
 Capitalized value of business = average profits ×
(100/NRR) = 90,000 × 10 = 9,00,000
 Capital employed = 200,000 + 240,000 + 50,000 – 10,000

= 4,80,000

Goodwill = 900,000 – 480,000 = 420,000

Capitalization of super profit
 Goodwill = Super Profits × (100/NRR)

 Super Profits = Average Profits – Normal Profits

 If the super profit is negative, there is no goodwill of

the firm.
 Example
 Average profit of the firm is 150,000.

 Total intangible assets in the firm are 14,00,000 and

outside liabilities are 4,00,000.
 In the same type of business, the normal rate of return
is 10% of the capital employed.
 Calculate value of goodwill by capitalization of super
profit method.
 Example contd.
 The first step in calculating goodwill using this
method is to calculate capital employed.
 Capital employed = total assets – outside liabilities

= 14,00,000 – 4,00,000

= 10,00,000

Using capital employed, we find normal profits

super profits = average profits – normal profits

 Example contd.
 Goodwill = Super Profits × (100/NRR) —(1)

 Super profit = average profit – normal profits

= 150,000 – normal profits (to be calculated) —(2)

Normal profits = capital employed × NRR/100

= 10,00,000 × 10/100 = 100,000 —(3)

From (2) and (3), Super Profit = 150,000 – 100,000 = 50,000

From (1), goodwill = 50,000 × 100/10 = Rs. 500,000

 Example
 The firm of P, Q, R earned 400,000 average profits
during the last three years.
 The capital employed in the business was 600,000.

 Normal rate of return of the industry is 8%.

 Calculate the goodwill of the firm by capitalizing the

super profits.
 Example contd.
 Normal profit = 8% of 600,000 = 48,000

 Super profit = Average profit – normal profit = 352,000

 Goodwill = super profit × (100/rate of return)

= 352,000 × (100/8)

= 44,00,000
 Example
 From this balance sheet on 31/3/2019, evaluate the
goodwill by capitalization of Super Profits, if the NRR
is 20% of the capital employed and average profit is
150,000. Liabilities Rs. Assets Rs.
Capital 500,000 Computers 150,000
Reserves 300,000 Furniture 50,000
Bank overdraft 200,000 Goodwill 150,000
Sundry creditors 300,000 N.T. Investments 200,000
Outstanding expenses 50,000 Sundry debtors 500,000
Stock 250,000
Cash in hand 50,000
 Example contd.
 Step 1: Capital employed = Total assets (except goodwill,
non trade investments and fictitious assets) – outside
liabilities

= Net assets – GW – Inv. – overdraft – creditors – Outs. Exp.

= 13,50,000 – 200,000 – 150,000 – 200,000 – 300,000 – 50,000

= 450,000
 Normal profit = 20% of capital employed = 90,000
 Example contd.
 Average Profit = 150,000

Super Profit = Average Profit – Normal Profit

= 150,000 – 90,000 = 60,000

Goodwill = Super Profits × (100/NRR)

= 60,000 × (100/20)

= 300,000
 Example
 J and K are partners in a firm.

 Their capitals are: J (300,000) and K (200,000).

 During the year ended 31/3/2020 the firm earned a

profit of Rs. 150,000.
 Assuming that the NRR is 20%, calculate the value
of goodwill using capitalization by average profit
method.
 Also using capitalization of super profit method.
 Example
 Ayub and Amit are partners in a firm and they admit
Jaspal into partnership with effect from 1/4/2019.
They agreed to value goodwill at 3 years’ purchase of
super profit method for which they decided to average
profit of 5 years.
 The firm has total assets of Rs. 20,00,000 and outside
liabilities of 5,00,000 as on that date.
 Normal rate of return in similar business is 10%.

Contd.
 Example contd.
 The profits for last five years were:
Year Net Profit
2014-15 150,000
2015-16 180,000
2016-17 100,000 Including abnormal loss of 100,000
2017-18 260,000 Including abnormal gain of 40,000
2018-19 240,000

 Calculate the goodwill

 Example contd.
 Let us start by calculating adjusted profits:

Year Net Profit Adjusted Profit

2014-15 150,000 150,000
2015-16 180,000 180,000
2016-17 100,000 Including abnormal loss of 100,000 200,000
2017-18 260,000 Including abnormal gain of 40,000 220,000
2018-19 240,000 240,000
Total 990,000
 Example contd.
 The firm has total assets of Rs. 20,00,000 and outside
liabilities of 5,00,000 as on that date.
 So, capital employed = 20,00,000 – 5,00,000 = 15,00,000

 Normal Profits = 15,00,000 × (10/100) = 1,50,000

Average profits = 990,000/5 = 198,000

So, super profits = 198,000 – 150,000 = 48,000

Therefore, goodwill = 48,000 × 3 = 144,000