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

Given Information:

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

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

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

Capitalised Value = $\frac{1,00,000 × 100}{10}$ = Rs. 10,00,000

This represents the total capital that should be invested in the business to earn Rs. 1,00,000 at 10% return.

Goodwill = Capitalised Value of Average Profits - Net Assets

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

The business is generating profits that justify a capital of Rs. 10,00,000, but the actual net assets are only Rs. 8,20,000. The difference of Rs. 1,80,000 represents the value of goodwill (the intangible advantage that enables the business to earn higher profits with lower capital investment).