Question

A firm earns rs 80000 the normal state of return is 10percent the asset of the firm amounted of rs 900000and liabilities to rs 300000 vance of good will be capitalisation of average profits will be

Answer 1

CORRECT QUESTION :

• ⊚ A firm earns Rs. 80,000. The normal rate of return is 10%. The assets of the firm amounted to Rs. 9,00,000 and liabilities to Rs. 3,00,000. Value of goodwill by the capitalisation of average profit will be ____.

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ANSWER :

• ❖ If the firm earns Rs. 80,000; the normal rate of return is 10%; the assets of the firm amounted to Rs. 9,00,000 and liabilities to Rs. 3,00,000; then the Value of Goodwill by the capitalisation of average profit will be Rs. 2,00,000.

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SOLUTION :

❒ Given :-

• Firm earns the profit of Rs. 80,000.

• Normal rate of return is 10%.

• Assets amounted to Rs. 9,00,000.

• Liabilities amounted to Rs. 3,00,000.

❒ To Calculate :-

• Goodwill of the firm as per Capitalisation of Average Profit Method = ?

❒ Required Formula :-

• $\dag \: \: \underline{ \boxed{ \sf{ \: Total \: \: Value \: \: of \: \: the \: \: firm = \dfrac{Average \: \: Profit \times 100}{ Normal \: \: Rate \: \: of \: \: Return} \: }}}$

• $\dag \: \: \underline{ \boxed{ \sf{ \: Total \: \: Capital \: \: Employed = Value \: \: of \: \: Assets - Value \: \: of \: \: Liabilities \: }}}$

• $\dag \: \: \underline{ \boxed{ \sf{ \: Value \: \: of \: \: Goodwill = Total \: \: Value \: \: of \: \: the \: \: Firm - Total \: \: Capital \: \: Employed \: }}}$

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❒ Calculation :-

It is given that,

• Profit of the firm = Rs. 80,000

• Normal Rate of Return = 10%

Using the formula of Total Value of the Firm, we get,

• $\bigstar \: \: \tt{Total \: \: Value \: \: of \: \: the \: \: firm = \dfrac{Average \: \: Profit \times 100}{Normal \: \: Rate \: \: of \: \: Return}}$

$\longrightarrow \: \tt{Total \: \: Value \: \: of \: \: the \: \: firm = \dfrac{Rs. \: 80,000 \times 100}{10 \: \%}}$

$\longrightarrow \: \tt{Total \: \: Value \: \: of \: \: the \: \: firm = Rs. \: 8,000 \times 100}$

$\longrightarrow \: \tt{Total \: \: Value \: \: of \: \: the \: \: firm = Rs. \: 8,00,000}$

Again,

• Value of Assets = Rs. 9,00,000.

• Value of Liabilities = Rs. 3,00,000.

Using the formula of Total Capital Employed, we get,

• $\bigstar \: \: \tt{Total \: \: Capital \: \: Employed = Value \: \: of \: \: Assets - Value \: \: of \: \: Liabilities}$

$\longrightarrow \: \tt{Total \: \: Capital \: \: Employed = Rs. \: 9,00,000 - Rs. \: 3,00,000}$

$\longrightarrow \: \tt{Total \: \: Capital \: \: Employed = Rs. \: 6,00,000}$

Now, we have,

• Total Value of the Firm = Rs. 8,00,000

• Total Capital Employed = Rs. 6,00,000

Using the formula of Goodwill as per Capitalisation of Average Profit, we obtain,

• ✪ Value of Goodwill = Total Value of the Firm - Total Capital Employed

⇒ Value of Goodwill = Rs. 8,00,000 - Rs. 6,00,000

∴ Value of Goodwill = Rs. 2,00,000