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A firm earned average profit of 3 lakhs during the last few years. The normal profit of return of the industry is 15%. The assets of the business were 17 lakhs and its liabilities were 2 lakhs. Calculate the goodwill of the firm by capitalisation of average profits.?
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A firm earned average profit of 3 lakhs during the last few years. The...
Solution:
Given data:
Average profit earned = 3 lakhs
Normal profit rate of return = 15%
Assets of the business = 17 lakhs
Liabilities of the business = 2 lakhs
Goodwill of the firm can be calculated by the following formula:
Goodwill = Capitalised value of average profits – (Net assets – Outside liabilities)
Calculation of Capitalised value of average profits:
Capitalised value of average profits = Average profits × 100 / Normal rate of return
= 3 lakhs × 100 / 15%
= 20 lakhs
Calculation of Net assets:
Net assets = Total assets – Total liabilities
= 17 lakhs – 2 lakhs
= 15 lakhs
Calculation of Goodwill:
Goodwill = Capitalised value of average profits – (Net assets – Outside liabilities)
= 20 lakhs – (15 lakhs – 0)
= 5 lakhs
Therefore, the goodwill of the firm is 5 lakhs.
Explanation:
Goodwill is the value of reputation or intangible assets of a business that generates profits over and above the normal rate of return. It is calculated by capitalising the average profits of the business. The capitalised value of average profits is the value of the business that generates profits at the normal rate of return. The net assets of the business are deducted from the capitalised value of average profits to calculate the goodwill. The net assets are the total assets of the business minus the total outside liabilities. The goodwill represents the value of the reputation of the business, which generates profits over and above the normal rate of return. A higher goodwill indicates a stronger reputation of the business and higher profits in the future.
Given data:
Average profit earned = 3 lakhs
Normal profit rate of return = 15%
Assets of the business = 17 lakhs
Liabilities of the business = 2 lakhs
Goodwill of the firm can be calculated by the following formula:
Goodwill = Capitalised value of average profits – (Net assets – Outside liabilities)
Calculation of Capitalised value of average profits:
Capitalised value of average profits = Average profits × 100 / Normal rate of return
= 3 lakhs × 100 / 15%
= 20 lakhs
Calculation of Net assets:
Net assets = Total assets – Total liabilities
= 17 lakhs – 2 lakhs
= 15 lakhs
Calculation of Goodwill:
Goodwill = Capitalised value of average profits – (Net assets – Outside liabilities)
= 20 lakhs – (15 lakhs – 0)
= 5 lakhs
Therefore, the goodwill of the firm is 5 lakhs.
Explanation:
Goodwill is the value of reputation or intangible assets of a business that generates profits over and above the normal rate of return. It is calculated by capitalising the average profits of the business. The capitalised value of average profits is the value of the business that generates profits at the normal rate of return. The net assets of the business are deducted from the capitalised value of average profits to calculate the goodwill. The net assets are the total assets of the business minus the total outside liabilities. The goodwill represents the value of the reputation of the business, which generates profits over and above the normal rate of return. A higher goodwill indicates a stronger reputation of the business and higher profits in the future.
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A firm earned average profit of 3 lakhs during the last few years. The normal profit of return of the industry is 15%. The assets of the business were 17 lakhs and its liabilities were 2 lakhs. Calculate the goodwill of the firm by capitalisation of average profits.?
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A firm earned average profit of 3 lakhs during the last few years. The normal profit of return of the industry is 15%. The assets of the business were 17 lakhs and its liabilities were 2 lakhs. Calculate the goodwill of the firm by capitalisation of average profits.? for Class 12 2024 is part of Class 12 preparation. The Question and answers have been prepared according to the Class 12 exam syllabus. Information about A firm earned average profit of 3 lakhs during the last few years. The normal profit of return of the industry is 15%. The assets of the business were 17 lakhs and its liabilities were 2 lakhs. Calculate the goodwill of the firm by capitalisation of average profits.? covers all topics & solutions for Class 12 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A firm earned average profit of 3 lakhs during the last few years. The normal profit of return of the industry is 15%. The assets of the business were 17 lakhs and its liabilities were 2 lakhs. Calculate the goodwill of the firm by capitalisation of average profits.?.
A firm earned average profit of 3 lakhs during the last few years. The normal profit of return of the industry is 15%. The assets of the business were 17 lakhs and its liabilities were 2 lakhs. Calculate the goodwill of the firm by capitalisation of average profits.? for Class 12 2024 is part of Class 12 preparation. The Question and answers have been prepared according to the Class 12 exam syllabus. Information about A firm earned average profit of 3 lakhs during the last few years. The normal profit of return of the industry is 15%. The assets of the business were 17 lakhs and its liabilities were 2 lakhs. Calculate the goodwill of the firm by capitalisation of average profits.? covers all topics & solutions for Class 12 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A firm earned average profit of 3 lakhs during the last few years. The normal profit of return of the industry is 15%. The assets of the business were 17 lakhs and its liabilities were 2 lakhs. Calculate the goodwill of the firm by capitalisation of average profits.?.
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