Question

A business earned average profits of ₹ 60,000 during the last three years. The normal rate of return on similar business is 12%. The value of net assets of the business is ₹ 4,00,000. Its goodwill by capitalisation of Average Profits Method will be ______.

Options

• ₹ 1,00,000

• ₹ 2,00,000

• ₹ 4,00,000

• ₹ 50,000

Answer 1

A business earned average profits of ₹ 60,000 during the last three years. The normal rate of return on similar business is 12%. The value of net assets of the business is ₹ 4,00,000. Its goodwill by capitalisation of Average Profits Method will be ₹ 1,00,000.

Explanation:

Capitalised Value = `("Actual Average Profit" xx 100)/"Normal Rate of Return"`

= `(60,000xx100)/12`

= ₹ 5,00,000

Goodwill = Capitalised Value − Assets

= ₹ 5,00,000 − ₹ 4,00,000

= ₹ 1,00,000