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Question
A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%?
Solution
Capital Employed = Assets − External Liabilities
= 10,00,000 − 1,80,000
= Rs 8,20,000
Normal Profit = Capital Employed × `"Normal Rate of Return"/100`
= 8,20,000 x `10/100`
= Rs 82,000
Super Profit = Actual Profit − Normal Profit
= 1,00,000 − 82,000
= Rs 18,000
Goodwill = Super Profit × `100/"Normal Rate of Return"`
= 18,000 x `100/10`
= Rs 1,80,000
Alternative Method
Capitalised Value = Actual Profit × `100/"Normal Rate of Return"`
Capitalised value = 1,00,000 x `100/10`
= Rs 1,00,000
Goodwill = Capitalised Value − Capital Employed
= 10,00,000 − 8,20,000
= Rs 1,80,000.
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