Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000; Rajani Rs. 2,00,000. During the year 2015 the firm earned a profit of Rs. 1,50,000. Calculate the value of goodwill of the firm by capitalisation method assuming that the normal rate of return is 20%?
Goodwill of the firm is Rs. 2,50,000.
Explanation
The question requires calculating goodwill using the capitalisation method. The context provides the answer key as Rs. 2,50,000. This method determines goodwill by comparing the capitalised value of the firm's average profits with the actual capital employed. The capitalised value is calculated by capitalising the actual profit at the normal rate of return.
Solution Steps
Step 1: Calculate Total Capital Employed Total Capital Employed = Rajan's Capital + Rajani's Capital = Rs. 3,00,000 + Rs. 2,00,000 = Rs. 5,00,000
Step 2: Calculate Capitalised Value of Business Capitalised Value = (Actual Profit × 100) / Normal Rate of Return = (Rs. 1,50,) / 20 = Rs. 7,50,000
Step 3: Calculate Goodwill Goodwill = Capitalised Value of Business - Capital Employed = Rs. 7,50,000 - Rs. 5,00,000 = Rs. 2,50,000