CA Foundation · Accounting · Partnership and LLP Accounts
The average annual profit of a firm is ₹90,000 and the normal rate of return is 15%. Goodwill is valued by the capitalisation of average profit method. The net assets (capital employed) of the firm are ₹5,00,000. What is the value of goodwill?
Goodwill is ₹1,00,000. Capitalising the average profit of ₹90,000 at 15% gives a total firm value of ₹6,00,000. Deducting the net assets of ₹5,00,000 leaves goodwill of ₹1,00,000 under the capitalisation of average profit method.
- A₹1,00,000Correct
- B₹6,00,000
- C₹1,35,000
- D₹90,000
Explanation
Capitalised value of average profit = 90,000 x 100/15 = 6,00,000. Goodwill = capitalised value less net assets = 6,00,000 - 5,00,000 = 1,00,000. The option ₹6,00,000 forgets to deduct the net assets.
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