Question

How is the value of goodwill calculated under the capitalisation method?

Answer 1

Capitalisation method:

Under the Capitalisation method, goodwill is the excess of capitalised value of the average profit of the business over the actual capital employed in the business.

Goodwill = Total capitalised value of the business – Actual capital employed

The total capitalised value of the business is calculated by capitalising on the average profits on the basis of the normal rate of return.

Capitalised value of the business = `"Average profit"/"Normal rate of return" xx 100`

Actual capital employed = Fixed assets (excluding goodwill) + Current assets – Current liabilities