Question

ABC Associates has decided to value the goodwill of the firm using capitalisation method. Find the goodwill of the firm if capital employed of the firm is $Rs.24,00,000$. Reasonable return on capital is $12.5$% and current years profit is $Rs.8,00,000$.

• A. $Rs.64,00,000$
• B. $Rs.40,00,000$
• C. $Rs.24,00,000$
• D. $Rs.56,00,000$

Answer 1

The correct option is B $Rs.40,00,000$

Goodwill of the firm using Capitalisation Method:

Step I: Capitalised value of Profits= Profit/Normal Rate of Return=$Rs.8,00,000/0.125$=$Rs.64,00,000$

Step II:Capital Employed= $Rs.24,00,000$ (given)

Step III:Goodwill= Step I - Step II= $Rs.40,00,000$