Admission of a Partner - Super Profit Method in Valuation of NonPurchased Goodwill:

Super Profit is the addition of original profit over the normal profit of an organization. An ordinary method of valuation of goodwill is the super profit method. A business organization may process some advantages which facilitate it to make additional profits over and above the amount that would grossed if the capital of the business organization was devoted elsewhere with like jeopardy. These additional profits usually expressed as super profits, can be esteemed and goodwill is the worth of the few years purchase of super profit.

Under this method, super profits are considered as the basis for computing goodwill in place of average profit. Similar to the previous method, that is average profit method, this value is also calculated by applying a traditional rule suitable in the trade for instance, three to four years purchase of super profit. For computing goodwill the below steps are followed: Step 1: The amount of capital invested is computed. Step 2: The normal return by increasing capital
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Invested with normal rate of return: Step 3: The average maintainable profit of the firm is to be computed. Step 4: The difference between the average maintainable profit and normal return as computed above is calculated. The difference is termed as Super Profit if the value is positive. Step 5: Product of super profit and the number of years purchase is computed. The resultant figure will be the goodwill.

ILLUSTRATION
X and Y are equal partners. They decide upon to admit Z for an equal share. For the purpose of admission of Z, the goodwill of the firm to be valued at 4 years purchase of super profit. The capital invested in the firm is $50,000. The normal rate of return may be taken as 10% per annum. Average maintainable profit of the firm is $7,500. Compute the value of the goodwill.

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SOLUTION

Capital Invested is $50,000, Normal return = $50,000 x 10% = $5,000 Average maintainable profit is $7,500 Super Profit = $7,500 - $5,000 = $2,500; the value of goodwill = $2,500 x 4 = $10,000

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