Question

If the capital employed in a business is Rs 5,00,000, the average profit is Rs 60,000, and the normal rate of return is 6 %, the goodwill by the Capitalisation of Average Profit Method will be:

• A. Rs 2,00,000
• B. Rs 1,00,000
• C. Rs 2,50,000
• D. Rs 5,00,000

Hint:

Capitalisation of Average Profit Method values goodwill as the excess capitalised profit over actual capital employed.

Answer 1

The Correct Option is D

Step 1: Calculate Normal Profit
Normal Profit \(= \text{Capital Employed} \times \text{Normal Rate of Return}\)
\[ = ₹5,00,000 \times 6\% = ₹30,000 \] Step 2: Capitalise Average Profit
Capitalised Value of Average Profit: \[ = \frac{₹60,000}{6\%} = ₹10,00,000 \] Step 3: Calculate Goodwill
\[ \text{Goodwill} = \text{Capitalised Value} - \text{Capital Employed} = ₹10,00,000 - ₹5,00,000 = ₹5,00,000 \] Step 4: Interpretation
The goodwill of the business, based on the excess average profit over the normal return, is ₹5,00,000.