From the following particulars, calculate value of goodwill of a firm by applying Capitalisation of Average Profit Method:
(i) Profits of last five consecutive years ending $31^{s t}$ March are 2018 --Rs. $54, 000$ , 2017 --Rs. $42, 000$ , 2016--Rs. $39, 000$ ,2015--Rs. $67, 000$ and 2014--Rs. $59, 000$ .
(ii) Capitalisation rate $20$ .
(iii) Net assets of the firm Rs. $2, 00, 000$ .

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Solution

Step 1: Calculation of Average Profit:
Average Profit= [ 54000+42000+39000+67000+59000]/5
= 261000/5
= 52200
Step 2: Calculation of Capitalised value of Profit:
Capitalised Value of profit= [ Profit * 100]/ Normal Rate Of Return
= [52200*100]/20
= 261000
Step 3: Calculation of Goodwill:
Goodwill= 261000-200000
= 61000

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