The average profit earned by a firm is Rs.150000. Firm has assets of Rs.550000, Partners’ capitals Rs.350000, General Reserve Rs.150000,
Creditors Rs.50000. If normal rate of return is 10%. Calculate the
amount of goodwill at two year purchase of super profit.
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Answer:
Goodwill = 100000
Explanation:
Capitalisation method of valuing goodwill:
Under this method, value of whole business id determined by applying normal rate of return. If such value (arrived at by applying normal rate of return) is higher than the capital employed in the business, then the difference is goodwill.
Calculation of goodwill under capitalisation method is:
Goodwill = (Average profit/ Normal rate of return) - Capital employed
Goodwill = Rs. (50000/ 20%) - Rs. 150000
Goodwill = Rs. 250000 - Rs 150000
Goodwill = Rs. 100000
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