A firm has assets worth `7,00,000 and liabilities `2,00,000. It has earned profit amounting to 62,000 during 2018-19. If rate of return is 10%, the good will of the firm based on capitalization method will be;
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Calculation of goodwill under capitalization basis:
Capital employed = Rupees. 800000
Rate of return = 15%
Average profit = Rupees. 1200000
Normal value of business = (Average profit/ Rate of return) * 100
Normal value of business = Rupees. (1200000/15) * 100
Normal value of business = Rupees. 8000000
Goodwill = Normal value of business - capital employed
Goodwill = Rupees. (8000000 - 800000)
Goodwill = Rupees. 7200000
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