Question

Find the goodwill of the firm using capitalisation, method from the following information:
Total Capital Employed in the firm Rs.8,00,000;
Reasonable Rate of Return 15%;
Profits for the year Rs. 12,00,000.

• A. $Rs.82,00,000$
• B. $Rs.12,00,000$
• C. $Rs.72,00,000$
• D. $Rs.42,00,000$

Answer 1

The correct option is C $Rs.72,00,000$

Calculation of goodwill under capitalisation basis:

Capital employed = Rs. 800000

Rate of return = 15%

Average profit = Rs. 1200000

Normal value of business = (Average profit/ Rate of return) * 100

Normal value of business = Rs. (1200000/15) * 100

Normal value of business = Rs. 8000000

Goodwill = Normal value of business - capital employed

Goodwill = Rs. (8000000 - 800000)

Goodwill = Rs. 7200000