A business has earned average profits of Rs. 2,00,000 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. 10,20,000.
Answer & explanation
Correct answer: option 3
Correct answer: Option (3) → Rs. 9,80,000
Concept: Under Capitalisation of Average Profits, goodwill = Capitalised value of average profit – Net assets (capital employed), as in Reconstitution of a Partnership Firm – Admission of a Partner.
Capitalised value = Average Profit / Normal Rate of Return = 2,00,000 / 10% = Rs 20,00,000.
Net assets of business = Rs 10,20,000.
Goodwill = 20,00,000 – 10,20,000 = Rs 9,80,000.