Question

give the formula for valuation of goodwill by the Capitalitation of average profit method
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Answer 1

Question:-

The formula for valuation of goodwill by the capitalisation if average profit method.

Answer:-

Capitalisation of average profit:-

Under this method ,the value of good will is ascertained by deducting the actual capital employed (net assets) in the business from the capitalised value of the average profit on the basis of normal rate of return . This involves the following steps:-

• Ascertain the average profits based on the past few years performance.
• capitalise the average profits on the basis of the normal rate of return to ascertain the capitalised value of average profits as follows:-

$\rm\purple{ \: average \: profits \times \frac{100}{normal \: rate \: of \: return} }$

• Ascertain the actual capital employed (net assets) by deducting outside liabilities from the total Assets (excluding goodwill)

$\rm\blue{ \: capital \: employed = total \:assets(excluding \: goodwill) - outside \: liabilities}$

• Compute the value of goodwill by deducting net assets from the capitalised value of average profits.

$\rm\red{ \: value \: of \: goodwill = capitalised \: value \: of \: avg. \: profit - net \: assets \: }$

Answer 2

Answer:

ᵐ/ˢ ᵐᵉʰᵗᵃ ᵃⁿᵈ ˢᵒⁿˢ ᵉᵃʳⁿ ᵃⁿ ᵃᵛᵉʳᵃᵍᵉ ᵖʳᵒᶠⁱᵗ ᵒᶠ ʳᵘᵖᵉᵉˢ 60,000 ʷⁱᵗʰ ᵃ ᶜᵃᵖⁱᵗᵃˡ ᵒᶠ ʳᵘᵖᵉᵉˢ 4,00,000. ᵗʰᵉ ⁿᵒʳᵐᵃˡ ʳᵃᵗᵉ ᵒᶠ ʳᵉᵗᵘʳⁿ ⁱˢ 10%. ᵘˢⁱⁿᵍ ᶜᵃᵖⁱᵗᵃˡⁱᶻᵃᵗⁱᵒⁿ ᵒᶠ ˢᵘᵖᵉʳ ᵖʳᵒᶠⁱᵗˢ ᵐᵉᵗʰᵒᵈ ᶜᵃˡᶜᵘˡᵃᵗᵉ ᵗʰᵉ ᵛᵃˡᵘᵉ ᵗʰᵉ ᵍᵒᵒᵈʷⁱˡˡ ᵒᶠ ᵗʰᵉ ᶠⁱʳᵐ.

ᵃⁿˢ: ᵍᵒᵒᵈʷⁱˡˡ = ˢᵘᵖᵉʳ ᵖʳᵒᶠⁱᵗˢ ˣ (100/ ⁿᵒʳᵐᵃˡ ʳᵃᵗᵉ ᵒᶠ ʳᵉᵗᵘʳⁿ) = 20,000 ˣ 100/10 = 2,00,000.