A business has earned average profits of Rs. 5,30,000 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. 30,00,000.
Answer & explanation
Correct answer: option 1
Correct answer: Option (1) → Rs. 23,00,000
Concept: Capitalisation of Average Profits Method – Goodwill = Capitalised value of average profit – Net Assets (capital employed), from Reconstitution of a Partnership Firm – Admission of a Partner.
Capitalised value = Average Profit × 100 ÷ Normal Rate of Return = 5,30,000 × 100/10 = Rs. 53,00,000
Net assets (capital employed) = Rs. 30,00,000
Goodwill = 53,00,000 – 30,00,000 = Rs. 23,00,000.