Question

the profits for the last years are rs.60,000;rs.40,000 and rs.66,500. the total assets of the firm are rs.10,00,000 and outside liabilities are rs.5,42,500. the rate of interest expected from capital invested is 10%. the vaule of goodwill on capitalisation basis is:

Answer 1

According to the Capitalization Method for Value of Goodwill,

Goodwill shall be valued as the difference between Normal Capital and Actual Capital Employed where,

Actual Capital Employed= Value of Assets (excluding Goodwill) - Outstanding Liabilities

and

Normal Capital= Average Profits X (100/ Normal Rate of Return(%))

In the Given case,

Average Profit= (60000 + 40000 + 66500) / 3yrs = 55500/-

Normal Rate of Return = 10%

Normal Capital = 55500 X (100/10) = 555000/-

Actual Capital Employed= 1000000 - 542500 = 457500/-

Therefore Value of Goodwill= 555000 - 457500 = 97500/-

Answer:- Value of Goodwill  on capitalisation basis is of Rs. 97500

Answer 2

Explanation:

As we know that Capitalization Method for Value of Goodwill

The Goodwill shall be valued as the difference between Normal Capital and Actual Capital Employed.

Where,

Actual Capital Employed= Value of Assets (excluding Goodwill) - Outstanding Liabilities

Normal Capital= Average Profits X (100/ Normal Rate of Return(%))

Here,

An Average Profit=

(60000 + 40000 + 66500) / 3yrs

An Average Profit = 55500/-

Normal Rate of Return = 10%

Normal Capital = 55500 X (100/10) = 555000/-

An Actual Capital Employed=

1000000 - 542500 =

457500/-

The Value of Goodwill= 555000 - 457500 = 97500/-

Final answer the Value of Goodwill on capitalisation basis is of Rs. 97500.