Enumerate two main steps involved in valuing Goodwill according to Super Profit Method.

For Calculating goodwill under this method, the steps are:

Step 1:

Calculate the Average Capital Employed as follows:

Opening Capital Employed + Closing Capital Employed/2

Capital Employed = Capital + Reserves – Fictitious Assets – Nor-trade Investments – Goodwill

or

Capital Employed = All Assets (except Goodwill, Non-trade Investments, and Fictitious Assets) – Outside Liabilities.

Step 2:

Calculate adjusted profit, i.e., actual average profit. Profit earned by a firm for the year is adjusted for abnormal gains and losses if any and recurring expenses that have not been incurred. The profit so determined is totalled and is averaged.

Step 3:

Calculate the normal profit or return on average capital employed by applying the following formula:

Normal Profit = Average Capital Employed × Normal Rate of Return/100

Step 4:

Calculate Super Profit, i.e., Actual Average Profit – Normal Profit.

Step 5:

Calculate the Value of goodwill as follows:

Goodwill = Super Profit × Number of Year’s Purchase