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Find the goodwill of the firm using capitalization method from the following information:
Total capital employed in the firm Rs. 80,00,000
Reasonable rate of return 15%
Profits for the year Rs. 12,00,000
Total capital employed in the firm Rs. 80,00,000
Reasonable rate of return 15%
Profits for the year Rs. 12,00,000
- a)Rs. 68,00,000.
- b)Rs. 12,00,000.
- c)Rs. 11,88,000.
- d)Nil.
Correct answer is option 'D'. Can you explain this answer?
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Find the goodwill of the firm using capitalization method from the fol...
To find the goodwill of the firm using the capitalization method, we need to calculate the value of the firm based on its current earnings.
The formula for calculating goodwill using the capitalization method is:
Goodwill = (Profits for the year / Reasonable rate of return) - Total capital employed in the firm
Let's calculate the goodwill using the given information:
Profits for the year = Rs. 12,00,000
Reasonable rate of return = 15%
Total capital employed in the firm = Rs. 80,00,000
Goodwill = (12,00,000 / 15%) - 80,00,000
Goodwill = (12,00,000 / 0.15) - 80,00,000
Goodwill = 80,00,000 - 80,00,000
Goodwill = 0
Therefore, the goodwill of the firm using the capitalization method is Nil (option D).
Explanation:
The capitalization method is used to calculate the value of a firm based on its expected future earnings. It assumes that the firm's value is equal to its earnings divided by a reasonable rate of return. The difference between the firm's value and its total capital employed is known as goodwill.
In this case, the profits for the year are Rs. 12,00,000 and the reasonable rate of return is 15%. The total capital employed in the firm is Rs. 80,00,000.
Using the formula mentioned above, we can calculate the goodwill. However, when we substitute the values into the formula, we find that the goodwill is equal to zero. This means that the firm's value is equal to its total capital employed, and there is no goodwill.
Therefore, the correct answer is option D - Nil.
The formula for calculating goodwill using the capitalization method is:
Goodwill = (Profits for the year / Reasonable rate of return) - Total capital employed in the firm
Let's calculate the goodwill using the given information:
Profits for the year = Rs. 12,00,000
Reasonable rate of return = 15%
Total capital employed in the firm = Rs. 80,00,000
Goodwill = (12,00,000 / 15%) - 80,00,000
Goodwill = (12,00,000 / 0.15) - 80,00,000
Goodwill = 80,00,000 - 80,00,000
Goodwill = 0
Therefore, the goodwill of the firm using the capitalization method is Nil (option D).
Explanation:
The capitalization method is used to calculate the value of a firm based on its expected future earnings. It assumes that the firm's value is equal to its earnings divided by a reasonable rate of return. The difference between the firm's value and its total capital employed is known as goodwill.
In this case, the profits for the year are Rs. 12,00,000 and the reasonable rate of return is 15%. The total capital employed in the firm is Rs. 80,00,000.
Using the formula mentioned above, we can calculate the goodwill. However, when we substitute the values into the formula, we find that the goodwill is equal to zero. This means that the firm's value is equal to its total capital employed, and there is no goodwill.
Therefore, the correct answer is option D - Nil.
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Find the goodwill of the firm using capitalization method from the following information:Total capital employed in the firm Rs. 80,00,000Reasonable rate of return 15%Profits for the year Rs. 12,00,000a)Rs. 68,00,000.b)Rs. 12,00,000.c)Rs. 11,88,000.d)Nil.Correct answer is option 'D'. Can you explain this answer?
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