Question

A firm earns 96,000 as its average profits. The rate of normal profit being 12%. The assets of the firm
amount to 8,00,000 and liabilities are 3,20,000. What will be the value of Goodwill ?
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Answer 1

Explanation: Rs 320000

Calculation of the value of Goodwill of the firm :

We know Capital employed is  Assets - Liabilities

In the above sum Asset  is Rs 8,00,000 and Liabilities is Rs 3,20,000

∴ Capital employed in the firm = Rs. 800000 - Rs 320000

Capital employed = Rs 4,80,000

To calculate the Normal value of business  we use the following formula Average profit/capitalization rate

Average Profit in the given question is Rs 96,000 and the Rate of normal profit is 12%

∴Normal value of business = Rs. 96000/ 12%

Normal value of business = Rs. 800000

To calculate the value of Goodwill of the firm we use the following formula : Normal value of business - Capital employed

∴Goodwill = Rs. 800000 - Rs. 480000

Goodwill = Rs. 320000

Hope this helps.

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