Question

The average net profit expected in future by Ram Gopal and sons are 25000 per year the average capital employed in the business by the firm is 180000 the normal rate of return is 10 percent calculate the goodwill with capitalisation of average profit​

Answer 1

Given data:

• The average profit is Rs 25,000.
• The capital employed is Rs 1,80,000.
• The normal rate of return [NRR] is 10%.

To find: The goodwill by capitalization of average profit.

Answer:

Capitalization of average profit = Average profit × (100 ÷ NRR)

Capitalization of average profit = Rs 25,000 × (100 ÷ NRR)

Capitalization of average profit = Rs 2,50,000

Goodwill = Capitalized value of the firm - Net assets

The amount of net assets, in this case, is equivalent to the capital employed, since:

• Net assets = Total assets - Total liabilities

and

• Capital = Total assets - Total liabilities

The capitalized value of the firm is equivalent to the capitalization of average profit.

Goodwill = Rs 2,50,000 - Rs 1,80,000

Goodwill = Rs 70,000

Therefore, the goodwill is Rs 70,000.