Question

A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%?

Answer 1

Capital Employed = Assets − External Liabilities
= 10,00,000 − 1,80,000
= Rs 8,20,000

Normal Profit = Capital Employed × `"Normal Rate of Return"/100`
= 8,20,000 x `10/100`
= Rs 82,000

Super Profit = Actual Profit − Normal Profit
= 1,00,000 − 82,000
= Rs 18,000

Goodwill = Super Profit × `100/"Normal Rate of Return"`

= 18,000 x `100/10`

= Rs 1,80,000
Alternative Method

Capitalised Value = Actual Profit × `100/"Normal Rate of Return"`

Capitalised value = 1,00,000 x `100/10`
= Rs 1,00,000

Goodwill = Capitalised Value − Capital Employed
= 10,00,000 − 8,20,000
= Rs 1,80,000.