Question

A business has earned average profit of ₹ 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are ₹ 10,00,000 and its external liabilities are ₹ 1,80,000. The normal rate of return is 10%.

Answer 1

Solution:

Goodwill = Capitalised Value of Average Profits - Actual Capital Employed

Capitalised Value of Average Profit = Average Profit x $\frac{Normal Rate of Return }{100}$

                              = 1, 00,000 x $\frac{100}{10}$ = 10,00, 000

Actual Capital Employed = 10, 00, 000 -1, 80,000 = 8,20, 000

Goodwill = 10, 00, 000 - 8,20, 000 = 1,80,000