Puneet and Tarun are in a restaurant business having

28 :- Puneet and Tarun are in a restaurant business having credit balances in  their fixed capital accounts 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 any liability. They are regularly earning profits and their average profit of last 5 years is Rs 1,00,000. If the normal rate of return is 10%, find the value of goodwill by capitalization of average profit method.

Solution:-

Calculation of capitalized value of the firm
Capitalized value of the firm = Average profit/Normal rate of return
                                             = 1,00,000 x 100/10
                                             = Rs 10,00,000

Capital employed = Fixed capitals + Fluctuating capitals
                             = 2,50,000 + 2,50,000 + 30,000 + 20,000
                             = Rs 5,50,000

Calculation of Goodwill of the firm
Goodwill = Total capitalized value of the firm – Capital employed
               = 10,00,000 – 5,50,000
               = Rs 4,50,000