Question

Find the goodwill of the firm using capitalization method from the following information:
Total Capital Employed 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

Answer: (C)

Rs.$72,00,000$

Goodwill using capitalization method:

Step 1: Capitalized value of profits: Profits/Reasonable Rate of Return=$Rs.12,00,000$/$0.15$=$Rs.80,00,000$

Step 2: Capital employed=$Rs.8,00,000$ (given)

Step 3: Value of Goodwill=Step 1 - Step 2= $Rs.80,00,000$-$Rs.8,00,000$= $Rs.72,00,000$