Question

Puneet and Trun are in restaurant business having credit balance in their fixed Capital Account as Rs. 2,50,000 each. They have credit balances in their Current Accounts of Rs. 30,000 and Rs. 20,000 respectively. The firm does not have any liability. They are regularly earning profits and their average profit fo last 5 years is Rs. 1,00,000. If the normal rate of return is `10%` find the value of goodwill by Capitalisation of Average Profit Method.

Answer 1

Capitalised Value of the Business `= ("Average Profit " xx 100)/("Normal Rate of Return")`
` " " = (Rs. 1,00,000 xx 100)/(10)=Rs. 10,00,000`
Capital Employed = Rs. 2,50,000 + Rs. 2,50,000 + Rs. 30,000 + Rs. 20,000 = Rs. 5,50,000
Goodwill = Rs. 10,00,000 - Rs. 5,50,000 = Rs. 4,50,000.