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
The correct answer is Option (3) → Rs. 9,80,000
Under the capitalisation of average profits method, the average profit is first turned into the capital it would justify at the normal rate of return. Goodwill is the amount by which that capitalised value exceeds the net assets.
Capitalised value of average profits = Average profit × 100 / Normal rate of return
= Rs. 2,00,000 × 100 / 10 = Rs. 20,00,000
Net assets = Rs. 10,20,000
Goodwill = Rs. 20,00,000 − Rs. 10,20,000 = Rs. 9,80,000
Note: NTA picked this question from an NCERT (2026-27) illustration and changed the figures. Do not ignore NCERT while practising numericals.
NCERT (2026-27 edition):
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