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A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return for a similar business is 10%. Ascertain the value of goodwill by capitalization of average profits method, given that the value of net assets of the business is Rs. 8,20,000.

Rs.1,75,000

Rs.1,80,000

Rs.1,90,000

Rs.1,85,000

✅ Correct Option: 2

Given Information:

Average Profits = Rs. 1,00,000
Normal Rate of Return = 10%
Net Assets = Rs. 8,20,000

Under the Capitalization of Average Profits Method, goodwill is calculated by finding the difference between the capitalized value of profits and the actual net assets.

Capitalized Value of Average Profits = Average Profits × $\frac{100}{\text{Normal Rate of Return}}$

Capitalized Value = 1,00,000 × $\frac{100}{10}$

Capitalized Value = 1,00,000 × 10 = Rs. 10,00,000

This capitalized value represents what the total firm should be worth based on its earning capacity at the normal rate of return.

Goodwill = Capitalized Value of Average Profits - Net Assets

Goodwill = 10,00,000 - 8,20,000 = Rs. 1,80,000

The goodwill of Rs. 1,80,000 represents the excess value of the business over its net assets, attributable to factors like reputation, customer base, and earning capacity beyond normal returns.

Correct Option: 2 (Rs. 1,80,000)

2022: 15 July Shift 2

X and Y are partners in a firm sharing profits in the ratio of 4:1. Z is admitted in the firm for $\frac{1}{5}$ share. On the admission of Z there was a balance of Rs. 20,000 in general reserve. What would be the journal entry for distributing the reserve.

2025: 30 May Shift 1

The profits for the five years of a firm are as follows – year 2013 Rs. 4,00,000;year 2014 Rs. 3,98,000; year 2015 Rs. 4,50,000; year 2016 Rs. 4,45,000 and year 2017 Rs. 5,00,000. Calculate the goodwill of the firm on the basis of a 4-year purchase of 5 years average profits:

2025: 3 June Shift 1

The capital of the firm is Rs. 1,00,000 and normal rate of return is 8%. If the average profits for last 5 years are Rs. 12,000 then find goodwill of the firm based on 3 years' purchase of super profits.

2025: 14 May Shift 2

Ramesh and Suresh are partners in a firm sharing profits in the ratio of 4:3. They admitted Mohan as a new partner. The profit sharing ratio of Ramesh, Suresh and Mohan will be 2:3:1. Choose the correct option with regards to the gain or sacrifice of old partner-

2025: 31 May Shift 1

Match List-I with List-II

List-I	List-II
Method of Valuation of Goodwill	Formula
(A) Average profit method	(I) Goodwill = Super profit × No. of years purchased
(B) Super Profit Method	(II) Goodwill = capitalized value of average profit - actual firm's capital.
(C) Capitalization of super profit method	(III) Goodwill = Average Profits × No. of years purchased
(D) Capitalization of average profit method	(IV) Goodwill = (Super profit/ Normal Rate of Return) × 100

Choose the correct answer from the options given below:

2026: 23 May Shift 2

The excess of actual profit over the normal profit is called as

A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return for a similar business is 10%. Ascertain the value of goodwill by capitalization of average profits method, given that the value of net assets of the business is Rs. 8,20,000.

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