Question

A firm has an average profit of Rs. 50,000 during the last certain years. The normal rate of return is 10%. The firm has net tangible assets of Rs. 3,00,000. Calculate the value of goodwill using capitalization method.

Answer 1

Average profit = Rs. 50,000 Normal rate of return = 10% 

Capitalised value of average profit = \(\frac{50,000 \times 100} {10}\) = Rs. 5,00,000 

Goodwill = Capitalised value of average profit - Total of net tangible assets. 

              = Rs. 5,00,000 – 3,00,000 = Rs. 2,00,000.