f average capital employed in a firm is ` 7,00,000, average of actualprofits is ` 1,70,000 and normal rate of return is 10% then value ofGoodwill as per capitalization of average profits is:(a) ` 10,00,000 (b) ` 17,00,000(c) ` 70,00,000 (d) ` 5,30,000
Question
f average capital employed in a firm is 7,00,000, average of actualprofits is 1,70,000 and normal rate of return is 10% then value ofGoodwill as per capitalization of average profits is:(a) 10,00,000 (b) 17,00,000(c) 70,00,000 (d) 5,30,000
Solution
To solve this problem, we need to follow these steps:
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Calculate the Normal Profits: Normal Profits = Average Capital Employed * Normal Rate of Return = 7,00,000 * 10% = `70,000
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Calculate the Super Profits: Super Profits = Actual Profits - Normal Profits = 1,70,000 - 70,000 = `1,00,000
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Calculate the Goodwill: Goodwill = Super Profits * 100 / Normal Rate of Return = 1,00,000 * 100 / 10 = `10,00,000
So, the value of Goodwill as per capitalization of average profits is 10,00,000. Therefore, option (a) 10,00,000 is the correct answer.
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