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
Under the capitalisation of super profits method, goodwill is the capital that would be needed to earn the super profit at the normal rate of return. So the super profit is multiplied by 100 ÷ normal rate of return.
Super profits = Rs 18,000
Multiplier = 100 ÷ 10 = 10
Goodwill = Rs 18,000 × 10 = Rs 1,80,000
The average profit of Rs 1,00,000 is not used directly: it already sits inside the super profit (Rs 1,00,000 − normal profit Rs 82,000 = Rs 18,000). Capitalising the whole average profit gives Rs 10,00,000, which is the capitalised value of the business, not its goodwill.
NCERT (2026-27 edition):
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