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Average Profit Method

What is meant...

Question

What is meant by Capitalisation of Average Profit?

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Solution

Capitalisation of Average profit is a method of valuation of goodwill. Under this method, goodwill is calculated by deducting the net assets of the business unit from the total value of the firm.
Total value of the firm= [Average Profit/ Normal rate of return]* 100
Hence, Goodwill= Total Value of the firm- Net assets of the business.

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Similar questions

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

Q. What is meant by Average Profit?

Q. If, average profit during last few years is

R s .100000

10

%. Ascertain the value of goodwill by capitalisation of average profit method if total assets are

R s .1500000

and liabilities

R s .680000

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Q. Answer briefly the following question:
Give the formula for valuation of goodwill by the Capitalisation of Average Profit Method.

Q. Average profit of GS & Co. is ₹ 50,000 per year. Average capital employed in the business is ₹ 3,00,000. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.

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