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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
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B
Rs.40,00,000
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C
Rs.24,00,000
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D
Rs.56,00,000
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Solution

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


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