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Average profit = Rs.3,72,000 Normal rate of return = 12% Total assets = Rs.68,00,000 Outside liabilities = Rs.42,00,000 Calculate the value of goodwill under capitalisation method.
  • a)
    Rs.5,00,000
  • b)
    Rs.6,00,000
  • c)
    Rs.7,00,000
  • d)
    Rs.8,00,000
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
Average profit = Rs.3,72,000 Normal rate of return = 12% Total assets ...
Calculation of Goodwill under Capitalisation Method:

Step 1: Calculation of Super Profit
Super Profit = Average Profit - Normal Profit
= Rs.3,72,000 - (12% of Rs.68,00,000)
= Rs.3,72,000 - Rs.8,16,000
= - Rs.4,44,000 (Negative Super Profit)

Step 2: Calculation of Capitalised Value of Super Profit
Capitalised Value = Super Profit x 100 / Normal Rate of Return
= (-Rs.4,44,000) x 100 / 12
= - Rs.37,00,000 (Negative Capitalised Value)

Step 3: Calculation of Goodwill
Goodwill = Capitalised Value - (Total Assets - Outside Liabilities)
= (-Rs.37,00,000) - (Rs.68,00,000 - Rs.42,00,000)
= -Rs.37,00,000 - Rs.26,00,000
= - Rs.63,00,000 (Negative Goodwill)

As the calculated goodwill is negative, it implies that the business is not worthy of any goodwill. Therefore, the value of goodwill is zero or negligible.

Hence, option 'A' (Rs.5,00,000) is incorrect.
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Average profit = Rs.3,72,000 Normal rate of return = 12% Total assets ...
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Average profit = Rs.3,72,000 Normal rate of return = 12% Total assets = Rs.68,00,000 Outside liabilities = Rs.42,00,000 Calculate the value of goodwill under capitalisation method.a)Rs.5,00,000b)Rs.6,00,000c)Rs.7,00,000d)Rs.8,00,000Correct answer is option 'A'. Can you explain this answer?
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