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Question
From the following information, find out the value of goodwill by capitalisation method:
- Average profit ₹ 20,000
- Normal rate of return 10%
- Tangible assets of the firm ₹ 2,20,000
- Liabilities of the firm ₹ 70,000.
Solution
Actual cap employed = Tangible Assets – Liabilities of the firm
= 2,20,000 – 70,000
= ₹ 1,50,000
Capitalised value of business = `"Average profit"/"Normal rate of return" xx 100`
= `(20,000)/10 xx 100`
= ₹ 2,00,000
Value of goodwill = Total capitalised average profit – Capital employed
= 2,00,000 – 1,50,000
= ₹ 50,000
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