Question

Under the capitalisation method, the formula for calculating the goodwill is : *

1 point

(A) Super profits multiplied by the rate of return

(B) Average profits multiplied by the rate of return

(C) Super profits divided by the rate of return

(D) Average profits divided by the rate of return​

Answer 1

Answer:

Under capitalisation basis, value of whole business is determined 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 gooodwill.

Formula for calculating goodwill under capitalisation basis is -

Goodwill = Super profit divided with expected rate of return.

Answer 2

Under the Capitalisation method, the formula for calculating the goodwill is: (C) Super Profits divided by the Rate of Return.

Super Profit = Average Profit - Normal Profit

Goodwill = Super Profit/Normal Rate of Return x 100

For Example: M/s Sharma 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 Capitalisation of Super Profits method, calculate the value of the goodwill of the firm.

Ans: Goodwill = Super profits x (100/ Normal Rate of Return)

⇒ 20,000 x 100/10

⇒ 2,00,000.

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