Determine the value of firm's goodwill by capitalization of the super profit method if the average profits are Rs 1,00,000, super profits are Rs 18,000 and the normal rate of return is 10%.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs 1,80,000
Given:
-
Average Profit = ₹1,00,000
-
Super Profit = ₹18,000
-
Normal Rate of Return = 10%
Formula (Capitalization of Super Profit Method):
Goodwill=[Super Profit×100]/ Normal Rate of Return = [18,000*100] /10 = 1,80,000