Question

From the following information, calculate value of goodwill of the firm by applying Capitalisation Method. Total capital of the firm is Rs.$16,00,000$.
Normal rate of return $10\%$. Profit for the year is Rs. $2,00,000$.

Answer 1

Step 1: Calculation of Capitalised Value of Profit:

Capitalised Value of profit= [ Profit * 100]/ Normal Rate Of Return

= [200000*100]/10

= 2000000

Step 2: Calculation of Total Capital:

Total Capital= 1600000

Step 3: Calculation of Goodwill:

Goodwill= Capitalised Value of Profit- Total Capital

= 2000000-1600000

= 400000