Question

If average capital employed in a firm is ₹8,00,000, average of actual profits is ₹1,80,000 and normal rate of return is10%, then value of goodwill as per capitalization of average profits is:

 (A) ₹10,00,000 (B) ₹18,00,000 (C) ₹80,00,000 (D) ₹78,20,000

Answer 1

Correct option is (A) ₹10,00,000

Explanation:

Average capital employed = ₹8,00,000

Average of actual profits = ₹1,80,000

Normal rate of return = 10%

Capitalized average profits = \(Average \ profits \times \frac{100}{Normal \ rate \ of\ return}\)

= \(₹1,80,000 \times\frac{100}{10}\)

= ₹18,00,000

Value of goodwill = Capitalized average profits - Average capital employed

= ₹18,00,000 - ₹8,00,000 

= ₹10,00,000

value of goodwill as per capitalization of average profits is ₹10,00,000