Question

How the goodwill is valued under the Capitalisation of Average Profits method?

Answer 1

First of all, Capitalised value of Average Profits is calculated as per the following formula :
Capitalised value of Average Profits = `("Average Profits" xx 100)/("Normal Rate of Return")`
Thereafter, Goodwill is calculated as follows :
Goodwill = Capitalised Value of Average Profits - Capital Employed