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Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Return is 15% and Profit for the year is ₹
12,00,000. The value of goodwill of the firm as per the capitalisation method would be?
12,00,000. The value of goodwill of the firm as per the capitalisation method would be?
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Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Retur...
Understanding Goodwill Calculation
To calculate the value of goodwill using the capitalization method, we need to determine the expected profit and compare it with the normal rate of return. Here's a step-by-step breakdown:
Total Capital Employed
- Total capital employed in the firm: ₹ 8,00,000
Normal Rate of Return
- Normal rate of return: 15%
- This means the expected profit from the capital employed is calculated as:
Expected Profit = Total Capital Employed x Normal Rate of Return
Expected Profit = ₹ 8,00,000 x 15% = ₹ 1,20,000
Actual Profit
- Profit for the year: ₹ 12,00,000
Excess Profit Calculation
- To find the excess profit, subtract the expected profit from the actual profit:
Excess Profit = Actual Profit - Expected Profit
Excess Profit = ₹ 12,00,000 - ₹ 1,20,000 = ₹ 10,80,000
Goodwill Calculation
- Goodwill is calculated by capitalizing the excess profit at the normal rate of return:
Value of Goodwill = Excess Profit / Normal Rate of Return
Value of Goodwill = ₹ 10,80,000 / 15% = ₹ 72,00,000
Final Conclusion
- The value of goodwill of the firm, as per the capitalization method, is ₹ 72,00,000. This indicates the firm's strong earning capacity above the normal profit expectations.
To calculate the value of goodwill using the capitalization method, we need to determine the expected profit and compare it with the normal rate of return. Here's a step-by-step breakdown:
Total Capital Employed
- Total capital employed in the firm: ₹ 8,00,000
Normal Rate of Return
- Normal rate of return: 15%
- This means the expected profit from the capital employed is calculated as:
Expected Profit = Total Capital Employed x Normal Rate of Return
Expected Profit = ₹ 8,00,000 x 15% = ₹ 1,20,000
Actual Profit
- Profit for the year: ₹ 12,00,000
Excess Profit Calculation
- To find the excess profit, subtract the expected profit from the actual profit:
Excess Profit = Actual Profit - Expected Profit
Excess Profit = ₹ 12,00,000 - ₹ 1,20,000 = ₹ 10,80,000
Goodwill Calculation
- Goodwill is calculated by capitalizing the excess profit at the normal rate of return:
Value of Goodwill = Excess Profit / Normal Rate of Return
Value of Goodwill = ₹ 10,80,000 / 15% = ₹ 72,00,000
Final Conclusion
- The value of goodwill of the firm, as per the capitalization method, is ₹ 72,00,000. This indicates the firm's strong earning capacity above the normal profit expectations.
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Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per the capitalisation method would be?
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Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per the capitalisation method would be? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per the capitalisation method would be? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per the capitalisation method would be?.
Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per the capitalisation method would be? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per the capitalisation method would be? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Total capital employed in the firm is ₹ 8,00,000, Normal Rate of Return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per the capitalisation method would be?.
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