A firm earned average profit of ₹ 3,00,000 during the last few years. The normal rate of return of the industry is 15%. The assets of the business were ₹ 17,00,000 - Accountancy

Sum

A firm earned an average profit of  ₹ 3,00,000 during the last few years. The normal rate of return of the industry is 15%. The assets of the business were ₹ 17,00,000 and its liabilities were ₹ 2,00,000. Calculate the goodwill of the firm by capitalisation of average profits.

Solution

Goodwill = Capitalised Value of the Firm – Net Assets
Goodwill = 20,00,000 – 15,00,000 = ₹ 5,00,000

Where,
Average Profit = ₹ 3,00,000
Normal Rate of Return = 15%

Capitalised Value of the firm = "Average Profit"/"Normal Rate of Return" xx 100 = (3,00,000)/(15) xx 100

Capitalised Value of the firm = ₹ 20,00,000

Net Assets = Total Assets – Liabilities

Net Assets = 17,00,000 – 2,00,000 = ₹ 15,00,000.

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