Q.A firm's average profit is ₹1,50,000 per annum, and the normal rate of return in this class of business is 10%. The firm's actual capital employed (net assets) is ₹12,00,000. Calculate the value of goodwill under the Capitalization of Average Profit Method.

First capitalize the average profit at the normal rate to find the total value the business should be worth; goodwill is the excess of this value over the actual capital employed.

Step 1 — Capitalized value of the business. Capitalized Value = Average Profit × 100 ÷ Normal Rate of Return = ₹1,50,000 × 100 ÷ 10 = ₹15,00,000.

Step 2 — Goodwill. Goodwill = Capitalized Value of the Business − Actual Capital Employed = ₹15,00,000 − ₹12,00,000 = ₹3,00,000.

Step 3 — Cross-check (dual solve) via the Super Profit route. Normal Profit = ₹12,00,000 × 10% = ₹1,20,000. Super Profit = ₹1,50,000 − ₹1,20,000 = ₹30,000. Capitalization of Super Profit = Super Profit × 100 ÷ Normal Rate of Return = ₹30,000 × 100 ÷ 10 = ₹3,00,000 — this SECOND, independent route (via super profit) arrives at exac …

Alternative method: compute the Super Profit first (Average Profit minus Normal Profit on the actual capital employed), then capitalize the Super Profit directly at the normal rate — this always arrives at the ide …

A common error is dividing by the rate as a whole number instead of treating it as a percentage — capitalizing at 10% means multiplying by 100/10 (=10), not by 1/10 or by 0.10 d …