Question

If Average Capital Employed in a firm is Rs9,00,000; Average Profits Rs2,80,000 and Normal rate of return is 20%, then value of goodwill as per capitalisation of super profits is :

• A. Rs1,24,000
• B. Rs5,00,000
• C. Rs45,00,000
• D. Rs3,36,000

Hint:

Remember that Super Profit measures excess earning capacity of the firm compared to its peers.

Answer 1

The Correct Option is B

Understanding Capitalization of Super Profits:
This method values goodwill based on the excess of actual profits over the normal profits, capitalized to determine the worth of the firm's reputation.
Step 1: Calculate Normal Profit Normal Profit = Average Capital Employed * Normal Rate of Return
Normal Profit = Rs9,00,000 * 20% = Rs1,80,000

Step 2: Calculate Super Profit Super Profit = Average Profit - Normal Profit
Super Profit = Rs2,80,000 - Rs1,80,000 = Rs1,00,000

Step 3: Calculate Goodwill Goodwill = Super Profit / Normal Rate of Return
Goodwill = Rs1,00,000 / 20% = Rs5,00,000

Therefore, the value of goodwill as per capitalisation of super profits is Rs5,00,000.