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Question
A firm earned an average profit of ₹ 3,00,000 during the last few years. The normal rate of return of the industry is 15%. The assets of the business were ₹ 17,00,000 and its liabilities were ₹ 2,00,000. Calculate the goodwill of the firm by capitalisation of average profits.
Solution
Goodwill = Capitalised Value of the Firm – Net Assets
Goodwill = 20,00,000 – 15,00,000 = ₹ 5,00,000
Where,
Average Profit = ₹ 3,00,000
Normal Rate of Return = 15%
Capitalised Value of the firm = `"Average Profit"/"Normal Rate of Return" xx 100 = (3,00,000)/(15) xx 100`
Capitalised Value of the firm = ₹ 20,00,000
Net Assets = Total Assets – Liabilities
Net Assets = 17,00,000 – 2,00,000 = ₹ 15,00,000.
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| 2015 | Profit | 5,000 |
| 2016 | Profit | 8,000 |
| 2017 | Loss | 3,000 |
| 2018 | Profit | 6,000 |
From the following information, calculate the value of goodwill under the annuity method:
| Particulars | ₹ |
| Average profit | 14,000 |
| Normal Profit | 4,000 |
| Normal rate of return | 15% |
| Years of purchase of goodwill | 5 |
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