Question

Explain the method of calculation of Goodwill on the basis of superprofit.

Hint:

Superprofit is the basis for calculating goodwill when the business's performance exceeds the expected normal return.

Answer 1

Step 1: Definition of Superprofit.
Superprofit is the excess of actual profit earned by the business over the normal profit. The normal profit is the minimum return that is expected from the business, which is usually the average return earned by similar businesses in the industry.
Step 2: Calculation of Goodwill.
Goodwill is calculated based on superprofit by the following method: 1. **Calculate the average profit:** The average profit is calculated by taking the profits of the last few years and finding the mean.
2. **Determine the normal profit:** Normal profit is calculated by applying an industry rate of return on the capital employed.
3. **Calculate the superprofit:** Superprofit is the difference between the actual average profit and the normal profit.
4. **Calculate Goodwill:** \[ \text{Goodwill} = \text{Superprofit} \times \text{Number of Years' Purchase} \]
Step 3: Conclusion.
Thus, goodwill is calculated by multiplying the superprofit with the number of years' purchase, which is agreed upon by the partners. Final Answer: \[ \boxed{\text{Goodwill = Superprofit} \times \text{Number of Years' Purchase}} \]