The correct answer is C. Rs. 2,00,000.
Goodwill is an intangible asset that arises when a business is purchased for more than the fair value of its net assets. It is often referred to as the “goodwill and reputation” of a business.
The capitalization method of goodwill valuation is based on the assumption that goodwill is the present value of the excess future profits that a business is expected to earn over and above the normal rate of return on its assets.
To calculate goodwill using the capitalization method, you need to know the following:
- The capital employed in the business
- The normal rate of profit
- The expected future profits
The capital employed is the total amount of money that has been invested in the business. This includes the amount of money that has been borrowed as well as the amount of money that has been invested by the owners.
The normal rate of profit is the rate of profit that a business is expected to earn on its assets. This is usually determined by looking at the average rate of profit earned by similar businesses in the same industry.
The expected future profits are the profits that the business is expected to earn in the future. These profits should be based on realistic expectations about the future performance of the business.
Once you have this information, you can calculate goodwill using the following formula:
Goodwill = Expected future profits x (1 + Normal rate of profit) / Capital employed
In this case, the capital employed is Rs. 1,50,000, the normal rate of profit is 20%, and the expected future profits are Rs. 50,000. Therefore, the goodwill is calculated as follows:
Goodwill = 50,000 x (1 + 20/100) / 1,50,000 = 2,00,000
Therefore, the amount of goodwill by capitalization method is Rs. 2,00,000.
Option A is incorrect because it is the capital employed.
Option B is incorrect because it is the normal rate of profit.
Option D is incorrect because it is the expected future profits.