Given Information:
- Average Profits = Rs. 1,00,000
- Normal Rate of Return = 10%
- Net Assets = Rs. 8,20,000
Under the Capitalization of Average Profits Method, goodwill is calculated by finding the difference between the capitalized value of profits and the actual net assets.
Capitalized Value of Average Profits = Average Profits × Normal Rate of Return100
Capitalized Value = 1,00,000 × 10100
Capitalized Value = 1,00,000 × 10 = Rs. 10,00,000
This capitalized value represents what the total firm should be worth based on its earning capacity at the normal rate of return.
Goodwill = Capitalized Value of Average Profits - Net Assets
Goodwill = 10,00,000 - 8,20,000 = Rs. 1,80,000
The goodwill of Rs. 1,80,000 represents the excess value of the business over its net assets, attributable to factors like reputation, customer base, and earning capacity beyond normal returns.
Correct Option: 2 (Rs. 1,80,000)