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Question

Capital employed by a partnership firm is Rs.1,00,000. Its average profit is Rs.20,000. Normal rate of return is 15%. Value of goodwill is _________.

A
Rs.33,333
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B
Rs.30,000
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C
Rs.23,333
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D
Rs.43,667
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Solution

The correct option is A Rs.33,333
Calculation of goodwill under capitalization basis:
Capital employed = Rs. 100000
Normal rate of return = 15%
Average profit = Rs. 20000
Normal value of business = Average profit/ Normal rate of return
Normal value of business = Rs. 20000/ 15%
Normal value of business = Rs. 133333
Goodwill = Normal value of business - Capital employed
Goodwill = Rs. (133333 - 100000) = Rs. 33333

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