About Super Profit Method

One of the methods for the valuation of goodwill is to employ the capitalization method. The value of goodwill is computed using this method by subtracting the actual capital used from the capitalization value of typical earnings based on the usual rate of return.

In the Capitalization method, there are two different approaches to calculating profits: 

  • average Profit Method Capitalization
  • The Super Profits Method of Capitalization

Method of Super Profits Capitalization

This approach involves capitalizing on the super profit at a regular rate of return and calculating the goodwill valuation.

Formula

The Capitalization of Super Profits Method's formula is

Capitalization of Super Profits Method = Average of Annual Super Profits x 100 / Normal rate of return

Example of Capitalization Method

The accompanying illustration can aid in better understanding the idea of the Capitalization of Average Profit Method.

By investing $3,000 in the capital, Kapoor and Associates may make an 80,000 profit. The average rate of return is 20%. The capitulation of super profit can be used to calculate goodwill value.

Solution

Normal profit = Capital employed x Normal rate of return / 100

= 3,00,000 x 20 / 100

= 60,000

Super profit = Average profit – Normal Profit

= 80000 – 60,000

= 20,000

Goodwill = Average of annual super profit x 100 / Normal Rate of return

= 20,000 x 100 / 20

= 1,00,000

Following are some of the multiple choice questions on the Super Profit Method with answers that will help the students in developing their knowledge.

Super Profit Method MCQ

1. If CP=Rs. 80; SP=Rs.120 then find profit percentage.

  • 33 13%33\ \frac{1}{3}\%33 31​%
  • 50 %50\ \%50 %
  • 40 %40\ \%40 %
  • 20 %20\ \%20 %

2. A boy had a bike for Rs 32,000 and was sold for Rs 46,000 . What was the boy's profit ?

  • Rs 13,000
  • Rs 14,000
  • Rs 4,000
  • Rs 78,000

3. Average profit of firm is ₹ 3,00,000.total tangible assets in the firm are ₹ 28,00,000 and outside liabilities ₹ 8,00,000.The NRR is 10% of capital employed.calculate goodwill by capitalisation of super profit method.

  • ₹ 14,00,000
  • ₹ 16,00,000
  • ₹ 18,00,000
  • ₹ 10,00,000

4. A firms earn ₹ 1,20,000 as its annual profits.The normal rate of profit being 10 % .Assets of the firm are ₹ 14,40,000 and liabilities are ₹ 4,40,000.Tick the correct option for goodwill by capitalisation method.

  • ₹ 4,00,000
  • ₹ 2,80,000
  • ₹ 2,00,000
  • ₹ 3,60,000

5. A boy had a bike for ₹ 32000 and was sold for ₹ 45000. What was the boy's profit?

  • ₹13000 
  • ₹12500
  • ₹23500
  • don't know

6. How many general method(s) of goodwill valuation

  • 6
  • 1
  • 4
  • 3

7. Capital Employed=

  • Tangible assets- outside liabilities
  • Average profit-Tangible assets
  • Super profit -outside liabilities
  • None of the above

8. Goodwill by super profit=

  • SPxNRR/100
  • SPx100/AP
  • SPx No of year purchase
  • SPx capital employed/100

9. Super profit =

  • Average profit-Normal profit
  • Normal profit-actual profit
  • Average Profit-capital employed
  • None of the above

10. Capital employed in the business is ₹ 2,00,000,Normal rate of return(NRR) on capital employed is 15 % .During the year firm earned a profit of ₹ 48,000.Find the correct option if goodwill is 3 years purchase of super profit.

  • ₹ 54,000
  • ₹ 60,000
  • ₹ 50,000
  • ₹ 48,000

11. The profits for the last 3 years were- 1st year-4,000 ,IInd year-6,000 and IIIrd year-2,000.Select correct option for goodwill on the basis of 3 years purchase of average profit.

  • ₹ 12,500
  • ₹ 12,000
  • ₹ 13,000
  • ₹ 16,000

12. Find out that goodwill which is accounted for as per Accounting Standard 26

  • Purchased goodwill only
  • Self generated goodwill only
  • both(a) and (b)
  • Goodwill brought in by a partner

13. Which of the following is/are method(s) of valuation of goodwill ?

  • Average profit method
  • super profit method
  • capitalisation method
  • All of the above

14. Nature of goodwill is

  • intangible asset
  • fictitious asset
  • long term liability
  • current asset

15. Which of the following factor(s) affect goodwill

  • Nature of business
  • Efficiency of management
  • Location
  • All of the above

16. What are expenses?

  • money spent on materials or bills
  • money earned
  • money you get to keep
  • None of these

17. How do you calculate profit?

  • income x price
  • expenses x income
  • expenses - income
  • income- expenses

18. Tom helped his uncle move. He spent $30 for gas for his truck, and $20 for work gloves. His uncle paid him $200 for his help. What was Tom's profit?

  • $50
  • $150
  • $250
  • $30

19. Evan earned $300 by doing yard work. His profit was $250. How much were his expenses?

  • $550
  • $300
  • $250
  • $50

20. How much Profit was made?Sell 2 candies for 10 baht. They cost costs 3 Baht each to buy.

  • 4 Baht
  • 6 Baht
  • 10 Baht
  • 2 Baht

21. How much Profit was made?Sell Lemonade for 40 baht a cup. It costs 20 Baht a cup to make.

  • 20 Baht
  • 30 Baht
  • 40 Baht
  • 50 Baht

22. How much Profit was made?Sell 2 Mangoes for 200 baht each. They cost costs 100 Baht each to buy.

  • 200 Baht
  • 100 Baht
  • 400 Baht
  • 500 Baht

23. How much Profit was made?Bought an iphone in Hong Kong for 20,000 Baht. Sold it in Bangkok for 30,000

  • 10,000 Baht
  • 30,000 Baht
  • 15,000 Baht
  • 20,000 Baht

24. How much Profit was made?Bought an iphone in China for 10,000 Baht. Sold it in Bangkok for 30,000 Baht

  • 10,000 Baht
  • 30,000 Baht
  • 15,000 Baht
  • 20,000 Baht

25. How much Profit was made?One cup of coffee costs 20 Baht to make. I sold 10 cups of coffee for 500 Baht.

  • 300 Baht
  • 200 Baht
  • 100 Baht
  • 50 Baht

26. How much Profit was made?Bought 1kg of bananas for 100 Baht. Sold them for 400 Baht.

  • 300 Baht
  • 200 Baht
  • 100 Baht
  • 50 Baht

27. How much Profit was made?Bought 3 packs of stickers for 30 Baht. Sold them for 20 baht EACH.

  • 30 Baht
  • 20 Baht
  • 10 Baht
  • 5 Baht

28. How much Profit was made?Buy a toy for 100 Baht. Sell it for 400.

  • 200 Baht
  • 300 Baht
  • 400 Baht
  • 500 Baht

29. How much Profit was made?Buy Roses for 30 Baht and Sell for 50 Baht

  • 20 Baht
  • 30 Baht
  • 40 Baht
  • 50 Baht

30. Find the selling price when:cost price = Rs.2475, loss = 8 %

  • Rs.2277
  • Rs.2673
  • Rs.2372
  • Rs.2296

31. Find the selling price, when:CP=Rs.600, profit = 13 %

  • Rs. 622
  • Rs. 522
  • Rs. 978
  • Rs. 678

32. Find the CP when:SP = Rs. 500 and profit = 10%

  • Rs. 454.55
  • Rs. 550
  • Rs. 450
  • Rs. 490

33. Find CP when:Loss = Rs. 20 and loss = 10 % on SP

  • Rs. 400
  • Rs. 200
  • Rs. 220
  • Rs. 440

34. Find the marked price when:Discount = 15% and SP= Rs. 1020

  • Rs. 1173
  • Rs. 1200
  • Rs. 1210
  • Rs. 867

35. Cost price =

  • selling prce - profit
  • profit - selling price
  • selling price + profit
  • none of the above

36. Loss =

  • SP - CP
  • SP + CP
  • CP - SP
  • none of the above

37. Percentage of profit =

  • Pr⁡ofitSP×100 %\frac{\Pr ofit}{SP}\times100\ \%SPProfit​×100 %
  • SP−CPCP×100 %\frac{SP-CP}{CP}\times100\ \%CPSP−CP​×100 %
  • CP−SPCP×100 %\frac{CP-SP}{CP}\times100\ \%CPCP−SP​×100 %
  • none of the above

38. Percentage of loss on SP =

  • SP−CPCP×100 %\frac{SP-CP}{CP}\times100\ \%CPSP−CP​×100 %
  • CP−SPCP×100 %\frac{CP-SP}{CP}\times100\ \%CPCP−SP​×100 %
  • SP−CPSP×100 %\frac{SP-CP}{SP}\times100\ \%SPSP−CP​×100 %
  • CP−SPSP×100 %\frac{CP-SP}{SP}\times100\ \%SPCP−SP​×100 %

39. Dicount =

  • selling price - marked price
  • marked price - selling price
  • marked price - cost price
  • cost price - marked price

40. Percentage of discount =

  • DiscountCP×100 %\frac{Discount}{CP}\times100\ \%CPDiscount​×100 %
  • DiscountSP×100 %\frac{Discount}{SP}\times100\ \%SPDiscount​×100 %
  • DiscountMP×100 %\frac{Discount}{MP}\times100\ \%MPDiscount​×100 %
  • none of the above

41. If CP =Rs. 500; SP = Rs.600 then find the profit % on SP.

  • 20 %
  • 30 %
  • 16 23 %16\ \frac{2}{3}\ \%16 32​ %
  • 16 13 %16\ \frac{1}{3}\ \%16 31​ %

42. If, loss = Rs.40 and SP = Rs.250 then find percentage of loss.

  • 15 %
  • 13.79%
  • 16%
  • 14.25%

43. If, loss = Rs.20 and CP =Rs. 500 then find percentage of loss on SP.

  • 4 %
  • 3.82 %
  • 4.67 %
  • 4.17 %

44. State true or false: If C.P is more there will be a profit

  • False
  • True

45. If C.P is more there will be a profit

  • False
  • True

46. C P = 2000S.P = 5000FIND WHETHER ITS PROFIT OR LOSE

  • 3000 PROFIT
  • 7000 PROFIT
  • 3000 LOSE
  • 7000 LOSE

47. What is the formula of loss?

  • c.p-s.p
  • s.p-c.p
  • Don't know
  • None of these

48. What is the formula of profit?

  • c.p-s.p
  • s.p-c.p
  • both options
  • None of these

49. State true or false: loss=s.p-c.p

  • true
  • false

50. Find the loss:Sam bought a car for ₹634000 and sold for ₹623000

  • ₹12000
  • ₹11000
  • ₹34000
  • No correct answer

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