Question

A business has earned average profit of Rs. 60,000 during the last few years. The assets of the business are Rs. 5,40,000 and its external liabilities are Rs. 80,000. The normal rate of return is 10%. Calculate the value of goodwill on the basis of capitalisation of super profits.
(Ans: Goodwill = Rs. 140000)

Answer 1

Capitalized Value of Average Profits = Average Profits X (100 / Normal Rate of Return)
                                                               =60000*100/10
                                                               =600000

Capital Employed = Assets – Liabilities
                             =540000-80000
                             =460000

Goodwill = Capitalised Value of Average Profits – Capital Employed
                 =600000-460000
                 =140000

Goodwill = 140000

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