Question

From the following information, find out the value of goodwill by capitalisation method:

1. Average profit ₹ 20,000
2. Normal rate of return 10%
3. Tangible assets of the firm ₹ 2,20,000
4. Liabilities of the firm ₹ 70,000.

Answer 1

Actual cap employed = Tangible Assets – Liabilities of the firm

= 2,20,000 – 70,000

= ₹ 1,50,000

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

= `(20,000)/10 xx 100`

= ₹ 2,00,000

Value of goodwill = Total capitalised average profit – Capital employed

= 2,00,000 – 1,50,000

= ₹ 50,000