What will be the value of goodwill by Capitalisation of Average Profit Method?
Average profit: Rs. 2,00,000
Normal rate of return: 10%
Value of net assets of business: Rs. 12,00,000
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 8,00,000
Under the capitalisation of average profits method, goodwill = capitalised value of the average profit − the firm’s actual capital (net assets).
Capitalised value = Average profit × 100 ÷ Normal rate of return
Capitalised value = Rs. 2,00,000 × 100 ÷ 10 = Rs. 20,00,000
Net assets = Rs. 12,00,000
Goodwill = Rs. 20,00,000 − Rs. 12,00,000 = Rs. 8,00,000
The capitalised value of Rs. 20,00,000 is what the business is worth on its profits; goodwill is only the part of it that the net assets do not explain.
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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