Question

a firm has made an avarage profit ₹60000 during the past few years.the normal rate of return in similar type of business 15%.the firm has a net tangible asset of 280000.compute the value of goodwill by capitalisatoin of profits

Answer 1

ANSWER :

• ❖ If a firm has made an avarage profit of Rs. 60,000 during the past few years; the normal rate of return in similar type of business is 15% and the firm has a net tangible asset of Rs. 2,80,000; then the value of goodwill by capitalisation of average profits will be Rs. 1,20,000.

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SOLUTION :

❒ Given :-

• The firm has made an avarage profit of Rs. 60,000.

• The normal rate of return of the firm is 15%.

• The firm has a net tangible asset of Rs. 2,80,000.

❒ To Calculate :-

• The value of goodwill by capitalisation of average profits = ?

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❒ Calculation :-

Here,

• Average Profit = Rs. 60,000

• Normal Rate of Return = 15%

So,

• ★ Capitalised value of Average Profit = $\rm{ \dfrac{Average \: \: Profit \times 100}{ Normal \: \: Rate \: \: of \: \: Return }}$

⇒ Capitalised value of Average Profit = $\rm{ \dfrac{Rs.\: 60,000 \times 100}{ 15 }}$

⇒ Capitalised value of Average Profit = $\rm{ \dfrac{Rs.\: 60,00,000}{ 15 }}$

⇒ Capitalised value of Average Profit = Rs. 4,00,000

Thus,

• ✠ Total value of the firm = Capitalised value of Average Profit

➜ Total value of the firm = Rs. 4,00,000

Now,

• Net Tangible Assets of the Firm = Rs. 2,80,000

• Total Value of the Firm = Rs. 4,00,000

We know that,

• $\dag \: \: \underline{ \boxed{ \sf{Value \: \: of \: \: Goodwill = Total \: \: Value \: \: of \: \: the \: \: Business - Net \: \: Tangible \: \: Assets }}}$

Using this formula, we get

• ✪ Value of Goodwill = Total Value of the Firm - Net Tangible Assets of the Firm

➨ Value of Goodwill = Rs. 4,00,000 - Rs. 2,80,000

∴ Value of Goodwill = Rs. 1,20,000