Question

explain the calculation of goodwill by capitalisation method​

Answer 1

Capitalisation method

• Capitalisation of average profit method.

Goodwill is calculated by deducting capital employed in the business from the capitalised value of average profit on the basis of normal rate of return.

Capitalised value of business = average profit × 100 ÷ NRR.

• Capitalisation of super profit method.

Goodwill is calculated by capitalizing super profit at the NRR.

Step 1. Calculate capital employed

• Net assets = all assets (other than Goodwill fictitious asset and no trade investment) - outside liabilities.

Step 2. Calculate normal profit on capital employed

• Normal profit = capital employed × NRR /100.

Step 3. Calculate average profit of past years.

Step 4. Calculate super profit

• Actual average profit - normal profit.

Step5. Calculation of Goodwill = super profit × 100 / NRR.

Thanks.