Question

Give the formula for calculation Goodwill by 'Capitalisation of Average Profit'.

Answer 1

Calculation of goodwill by Capitalisation of Average Profit method:

Step 1: Calculate average maintainable profit, which is average profit after the adjustment of abnormal and extraordinary items.

Step 2: Calculate capitalised value of the business:

Capitalised value of business= [Average maintainable profit/ Normal rate of return]

Step 3: Calculate net assets:

Net assets= All identifiable assets at their current value- Outsider's Liabilities

Step 4: Calculate Goodwill :

Goodwill= Capitalised value of business- Net assets