Question

Form 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 31st March are: 2019 − ₹ 54,000; 2018 − ₹ 42,000; 2017 − ₹ 39,000; 2016 − ₹ 67,000 and 2015 − ₹ 59,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm ₹ 2,00,000.

Answer 1

Goodwill = Capitalised Value of Average Profit - Net Assets (Capital Employed)
Average Profit = `[54,000 + 42,000 + 39,000 + 67,000 + 59,000]/5`
= `[2,61,000]/5` = Rs. 52,200.

Capitalised Value of Average Profit = Average Profit x `100/"Normal Rate of Return"`

= `52,000 xx 100/20` = Rs. 2,61,000

∴ Goodwill = 2,61,000 - 2,00,000 = Rs. 61,000.