How is the value of goodwill calculated under the capitalisation metho

1.	How is the value of goodwill calculated under the capitalisation method?
Answer» Capitalisation method: Under Capitalisation method, goodwill is the excess of capitalised value of average profit of the business over the actual capital employed in the business. Goodwill = Total capitalised value of the business – Actual capital employed The total capitalised value of the business is calculated by capitalising the average profits on the basis of the normal rate of return. Capitalised value of the business = (Average profit )/(Normal rate of return) x 100 Actual capital employed = Fixed assets (excluding goodwill) + Current assets – Current liabilities

How is the value of goodwill calculated under the capitalisation method?

Answer»

Capitalisation method:

Under Capitalisation method, goodwill is the excess of capitalised value of average profit of the business over the actual capital employed in the business.

Goodwill = Total capitalised value of the business – Actual capital employed

The total capitalised value of the business is calculated by capitalising the average profits on the basis of the normal rate of return.

Capitalised value of the business = (Average profit )/(Normal rate of return) x 100

Actual capital employed = Fixed assets (excluding goodwill) + Current assets – Current liabilities

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