Question

Give your suggestions to the following arguments. “Under capitalisation method, the firm will have good will only if the value of net tangible assets are more than the capitalised value of profit.”

Answer 1

Under capitalisation method Value of goodwill = Total value of business – Net as-sets 

Total value of business

\(= \frac{Actual \,profit \,of \,the \,firm}{Normal\, rate \,of \,return} \times 100\)

Net assets = Assets – Liabilities The above equation proves that, a firm will have goodwill only if the value of net tangible assets are less than the capitalised value of profit.