Class 12 Accountancy

Welcome to Class 12 Accountancy. Follow Goodwill: nature and methods of valuation, then practise in the learning system. Sign in and use the study header to open your authorised course. Select this published lesson. Start Course Tutor with Auto audio on: it teaches continuously, answers a typed question, then resumes. Keep your board, session and medium selected. Capitalisation carries the same logic further. Capitalising the super profit at the normal rate gives the capital that would be needed to generate that super profit for ever. A firm's adjusted profits for four years, earliest first, are one lakh ten thousand, one lakh thirty thousand, one lakh fifty thousand and one lakh seventy thousand rupees. The capital employed is ten lakh, the normal rate of return in this line of business is taken as ten per cent, and goodwill is to be valued at three years' purchase. Start with the average profit method. The four profits add to five lakh sixty thousand, so the average is one lakh forty thousand. Goodwill at three years' purchase is three times one lakh forty thousand, that is four lakh twenty thousand rupees. Now the weighted average method, with weights of one, two, three and four given to the years in order. The products are one lakh ten thousand, two lakh sixty thousand, four lakh fifty thousand and six lakh eighty thousand, which total fifteen lakh. The weights add to ten, so the weighted average profit is one lakh fifty thousand. Goodwill is three times that, or four lakh fifty thousand rupees. Notice why the weighted figure is higher. Profits are rising steadily, and weighting gives the recent, better years more say. If profits had been falling, the weighted figure would have been the lower of the two. Now the super profit method. The normal profit is ten per cent of the capital employed of ten lakh, which is one lakh. The actual average profit is one lakh forty thousand, so the super profit is forty thousand. Goodwill at three years' purchase is three times forty thousand, that is one lakh twenty thousand rupees. Now capitalise the super profit. Forty thousand capitalised at ten per cent means asking what capital, earning ten per cent, would yield forty thousand a year. Dividing forty thousand by ten per cent gives four lakh rupees of goodwill. Finally capitalise the average profit. One lakh forty thousand capitalised at ten per cent gives fourteen lakh, which is the total capital the firm's earnings justify. The firm actually employs ten lakh, so goodwill is four lakh rupees. The two capitalisation routes agree exactly, which is a good arithmetic check on your work. Look at the spread of answers: four lakh twenty thousand, four lakh fifty thousand, one lakh twenty thousand and four lakh. They differ because they answer slightly different questions, and this is why partners must agree the method in the deed rather than argue about it afterwards. Ask Course Tutor to explain this step: The weights add to ten, so the weighted average profit is one lakh fifty thousand. Say what you tried. Pause and try this source task. Average profit is one lakh twenty thousand, normal rate ten per cent, capital employed nine lakh. Goodwill by capitalisation of average profit? The source answer is: Three lakh. Compare your method and result, correct an error, then continue. Use Stop to end Course Tutor.