A business has earned average profits of ₹2,50,000 during the last few years. The firm has assets of ₹25,00,000 and external liabilities of ₹4,50,000. The similar business has rate of return of 10%. Calculate value of Goodwill by Capitalisation method of super profit method.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) - ₹ 4,50,000.
Average profits = ₹2,50,000
Capital employed = Assets - Liabilities
= 25,00,000 - 4,50,000
= ₹20,50,000
Rate of return = 10%
Normal profit = 20,50,000 x 10/100
= ₹2,05,000
Super profit = Average profit -Normal profit
= 2,50,000 - 2,05,000
= ₹45,000
Goodwill = Super profit x 100/Normal rate of return
= 45,000 x 100/10
= ₹4,50,000