If Average Capital Employed in a firm is ₹9,00,000; Average Profits ₹2,80,000 and Normal rate of return is 20%, then value of goodwill as per capitalisation of super profits is:
Answer & explanation
Correct answer: option 2
The correct answer is option 2- ₹5,00,000.
Normal profit = Average capital employed x Normal rate of return/100
= 9,00,000 x 20/100
= ₹1,80,000
Super profit = Average profit -Normal profit
= 2,80,000 -1,80,000
= ₹1,00,000
Goodwill as per capitalisation of super profit = Super profit x 100/ Normal rate of return
= 1,00,000 X 100/20
= ₹5,00,000