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

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

Calculation of goodwill under capitalization basis-

Capital employed = Rs. 800000

Normal value of business = Average profit/capitalization rate

Normal value of business = Rs. 120000/ 15%

Normal value of business = Rs. 8000000

Goodwill = Normal value of business - capital employed

Goodwill = Rs. 8000000 - Rs. 800000

Goodwill = Rs. 7200000