If average capital employed in a firm is ₹8,00,000, average of actual profits is ₹1,80,000 and normal rate of return is 10%, then value of goodwill as per capitalization of average profits is:
(A) ₹10,00,000
(B) ₹18,00,000
(C) ₹80,00,000
(D) ₹78,20,000
(A) ₹10,00,000
Explanation:
Normal Rate of Return = 10 %
Capitalised Value of Profit = Average Profit × `"100"/"Normal Rate of Return"`
= 1,80,000 × `100/10`
= 18,00,000
Capitalised Value of Profit = Rs. 18,00,000
Capital Employed = Rs, 8,00,000
Goodwill = Capitalised Value of Profit - Capital Employed
= 18,00,000 - 8,00,000
= 10,00,000
Goodwill = ₹ 10,00,000