Question

A firm earns ₹ 1,10,000. The normal rate of return is 10%. The assets of the firm amounted to ₹ 11,00,000 and liabilities to ₹ 1,00,000. Value of goodwill by capitalisation of Average Actual Profits will be ______.

Options

• ₹ 2,00,000

• ₹ 10,000

• ₹ 5,000

• ₹ 1,00,000

Answer 1

A firm earns ₹ 1,10,000. The normal rate of return is 10%. The assets of the firm amounted to ₹ 11,00,000 and liabilities to ₹ 1,00,000. Value of goodwill by capitalisation of Average Actual Profits will be ₹ 1,00,000.

Explanation:

Given:

Average Actual Profit = ₹ 1,10,000

Normal Rate of Return (NRR) = 10%

Assets = ₹ 11,00,000

Liabilities = ₹ 1,00,000

Capital Employed = Assets − Liabilities

= 11,00,000 − 1,00,000

= ₹ 10,00,000

Capitalised Value = `"Average Actual Profits" xx 100/"NRR"`

= `1,10,000 xx 100/10`

= ₹ 11,00,000

Goodwill = Capitalised Value − Capital Employed

= 11,00,000 − 10,00,000

= ₹ 1,00,000