A firm had employed 400000 as capital and earned profits of 75000 including 15000 received as insurance claim . The money could be invested in a bank for 3 years @10% per annum.
Considering 2% as fair compensation for risk involved in the firm, calculate goodwill of the firm on the basis of capitalisation method.
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Explanation:
Capitalisation of Super Profit Method:
Step 1: Calculation of Capital Employed:
Capital Employed= Assets- External Liabilities
= 4000000- 720000
= 3280000
Step 2: Calculation of Normal Profit:
Normal Profit= 3280000 * [10/100]
= 328000
Step 3: Calculation of Average Profit:
Average Profit= 400000
Step 4: Calculation of Super Profit:
Super Profit= 400000- 328000
= 72000
Step 5: Calculation of Goodwill:
Goodwill= Super Profit * [100/Normal Rate Of Return]
= 72000 * [100/10]
= 720000
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