Under the Capitalization of Average Profit Method, goodwill is calculated using the relationship:
Goodwill = Capitalized Value of Average Profits - Net Assets
Given:
- Goodwill = Rs 1,80,000
- Net Assets = Rs 8,20,000
Substituting in the formula:
Rs 1,80,000 = Capitalized Value of Average Profits - Rs 8,20,000
Capitalized Value of Average Profits = Rs 1,80,000 + Rs 8,20,000
Capitalized Value of Average Profits = Rs 10,00,000
The logic is simple: The capitalized value represents the total value of the business based on its earning capacity. When we subtract what the business actually owns (Net Assets), the difference represents the value of intangible benefits, which is Goodwill.
Correct Option: 3