The correct answer is: B. Rs. 60,000
Goodwill is the excess of the purchase price of a business over the fair value of its net assets. It is often referred to as the “goodwill and favorable reputation” of a business.
The capitalization method of goodwill valuation is based on the assumption that the goodwill of a business is equal to the present value of the excess earnings of the business over the normal return on its capital.
To calculate goodwill by the capitalization method, we need to know the following:
- The average profit of the business
- The firm’s capital
- The normal return of the business
The average profit of the business is given as Rs. 10,000. The firm’s capital is given as Rs. 70,000. The normal return of the business is expected at 10%.
The formula for calculating goodwill by the capitalization method is:
Goodwill = Average profit * (1 + Normal return) / Normal return
= Rs. 10,000 * (1 + 10%) / 10%
= Rs. 60,000
Therefore, the goodwill of the business is Rs. 60,000.
Option A is incorrect because it is the value of the firm’s capital.
Option C is incorrect because it is the value of the firm’s average profit.
Option D is incorrect because it is the value of the firm’s normal return.