Question

Find the goodwill of the firm using capitalization method from the following information:
Capital employed $Rs.4,80,000$;
Rate of normal return - $15\%$;
Profits for the year $Rs.90,000$.

• A. $Rs.4,20,000$
• B. $Rs.3,11,000$
• C. $Rs.1,20,000$
• D. $Rs.2,20,000$

Answer 1

The correct option is C $Rs.1,20,000$

Calculation of goodwill under capitalization basis-

Capital employed = Rs. 480000

Normal value of business = Average profit/capitalization rate

Normal value of business = Rs. 90000/ 15%

Normal value of business = Rs. 600000

Goodwill = Normal value of business - capital employed

Goodwill = Rs. 600000 - Rs. 480000

Goodwill = Rs. 120000