A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 10%. Ascertain the value of goodwill by capitalisation of average profits method, given that the value of net assets of the business is Rs. 8,20,000.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 1,80,000
Under the capitalisation of average profits method, the average profit is first capitalised at the normal rate of return; goodwill is the excess of that capitalised value over the net assets.
Capitalised value = Average profits × 100 / Normal rate of return
= Rs. 1,00,000 × 100 / 10 = Rs. 10,00,000
Goodwill = Capitalised value − Net assets
= Rs. 10,00,000 − Rs. 8,20,000 = Rs. 1,80,000
NCERT (2026-27 edition):
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