Question 46 of 64intermediate🔧 ApplyNumerical4 marks

A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%?

Correct Answer

Rs. 1,80,000

Exercise: Questions for Practice | Q: 17 | (Page 54)
For More Understanding

Explanation

This question is solved using the Capitalisation of Average Profits method as described in the textbook context. The method involves determining the capitalised value of the average profits and then subtracting the net assets of the firm to arrive at the goodwill value.

Solution Steps

  1. Step 1: Calculate Capitalised Value of Average Profits Formula: Average Profits × 100 / Normal Rate of Return Calculation: Rs. 1,00,000×100000 \times 100 / 10 = Rs. 10,00,000.

  2. Step 2: Calculate Net Assets (Actual Firm's Capital) Formula: Total Assets – External Liabilities Calculation: Rs. 10,00,000 – Rs. 1,80,000 = Rs. 8,20,000.

  3. Step 3: Calculate Goodwill Formula: Capitalised Value of Average Profits – Net Assets Calculation: Rs. 10,00,000 – Rs. 8,20,000 = Rs. 1,80,000.

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