Question

A business has earned average profits of Rs. 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 Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%?

Answer 1

Answer:

Calculation of Capital Employed:

Capital Employed= Assets- External Liabilities

= 1000000- 180000

= 820000

Calculation of Capitalised value of Profit:

Capitalised Value of Profit= Profit * [100/rate of return]

= 100000 *[100/10]

= 1000000

Calculation of Goodwill:

Goodwill= Capitalised value of profit- Capital employed

= 1000000-820000

= 180000