A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 10%. Ascertain the value of goodwill by capitalisation average profits method, given that the value of net assets of the business is Rs. 8,20,000.

Explanation

Capilalised value of Average Profits
Rs. `(1,00,000 xx 100)/(10) = Rs. 10,00,000`
Goodwill = Capitalised value - Net Assets
= Rs. 10,00,000 - Rs. 8,20,000
= Rs, 1,80,000
(b) (b) Capitalisation of Super Profits: Goodwill can also be ascertained by capitalising the super profit directly. Under this method there is no need to work out the capitalised value of average profits. It involves the following steps.
(i) Calculate capital employed of the firm, which is equal to total assets minus outside liabilities.
(ii) Calculate normal profits on capital employed.
(iii) Calculate average profit for past years, as specified.
(ii) Calculate super profits by deducting normal profits from average profits.
(iii) Multiply the super profits by the required rate of return multiplier, that is,