Steps to calculate Goodwill using Super Profit Method?
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The following steps are involved in the calculation of goodwill using super profit method.
1. Calculate the total capital of the business. It will be the sum total of all the net current and fixed assets along with the shareholders equity.
2. Determine the normal profit by multiplying the total capital employed with the normal rate of return.
3. Calculate the average estimated profit or average manageable profit
4. Calculate super profit by subtracting the value of normal profit from the average estimated profit to determine the super profit.
5. Multiply the super profit by the number of years of purchase to determine the goodwill.
It can be expressed in formula as follows:
Normal Profit = Capital Employed x (Normal Rate of Return/100)
Super Profit = Average estimated profit – Normal Profit
Goodwill = Super Profit x No. of years of purchase