Question

From the following information, calculate value of goodwill of the firm by applying Capitalisation Method: Total Capital of the firm ₹ 16,00,000.
Normal rate of return 10%. Profit for the year ₹ 2,00,000.

Answer 1

Goodwill = Capitalised Value of Profit - Actual Capital

Capitalised Value of Profit = `["Profit" xx 100]/"Normal rate of Return"`
= `[ 2,00,000 xx 100 ]/10`

= Rs. 20,00,000.

Total Capital = Rs 16,00,000
∴ Goodwill = 20,00,000 - 16,00,000 = Rs. 4,00,000.