A business has earned average profits of Rs 1,00,000 during the last few years and the normal rate of return in a similar type of business is 10%. Ascertain the value of goodwill by capitalization of average profit method. Given that the value of net asset of the business is Rs 8,20,000.

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Solution

Average profit = Rs 1,00,000

Capitalisation of average profit = $1, 00, 000 \times \frac{100}{10} = Rs 10, 00, 000$

Capital employed in the business = Rs 8,20,000

Therefore, Goodwill = $10, 00, 000 - 8, 20, 000 = Rs 1, 80, 000$

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Q. A business has earned average profit of ₹ 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are ₹ 10,00,000 and its external liabilities are ₹ 1,80,000. The normal rate of return is 10%.

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A business has earned average profits of Rs 1,00,000 during the last few years and the normal rate of return in a similar type of business is 10%. Ascertain the value of goodwill by capitalization of average profit method. Given that the value of net asset of the business is Rs 8,20,000.

Average profit = Rs 1,00,000 Capitalisation of average profit = 1,00,000×10010=Rs 10,00,000 Capital employed in the business = Rs 8,20,000 Therefore, Goodwill = 10,00,000−8,20,000=Rs 1,80,000

Average profit = Rs 1,00,000

Capitalisation of average profit = $1, 00, 000 \times \frac{100}{10} = Rs 10, 00, 000$

Capital employed in the business = Rs 8,20,000

Therefore, Goodwill = $10, 00, 000 - 8, 20, 000 = Rs 1, 80, 000$