VALUATION OF GOODWILL

➢ AVERAGE PROFIT METHOD:

- SIMPLE AVERAGE PROFIT METHOD:

1. Mr. Amar has been doing business, intends to sell his business on 1-3-2019. From the following
particulars, ascertain the amount of goodwill based on 3 years purchase of average profits of last
4 years. The profits during 4 years were as follows:
2015-16 = Rs.2,00,000
2016-17 = Rs.2,40,000
2017-18 = Rs.3,00,000
2018-19 = Rs.3,60,000
At the time of acquisition of business, the buyer was employed as a manager of similar business
on a salary of Rs.6,000 per month. The profits of 2018-19 include income from investment of
Rs.20,000. The profits of 2015-16 were reduced by Rs.60,000 being loss on speculation.
Similarly, in 2017-18 profits were reduced by Rs.1,00,000 due to loss from betting.

2. Ramesh purchased a business from Suresh from 1-4-2019. Profit earned by Suresh for the
preceding years were
2016-17 - 5,00,000
2017-18 - 6,00,000
2018-19 - 5,40,000.
It was found that the profits for the year 2016-17 included a non-recurring income of 20,000 and
profits for the year 2018-15 was reduced by 30,000 due to an abnormal loss on account of a small
fire in the shop. The properties of the business were not insured in the past, but it was thought
prudent to insure the property in future at premium of 35,000 p.a. Ramesh at the time of purchase
of business was employee as manager of an identical business concern at a monthly salary of
10,000. He intends to replace the manager of business who is drawing a salary of 7,500 p.m. The
Goodwill is estimated at 2 years purchase of average profits. Calculate Goodwill.

3. Ganesh and Co., decided to purchase a business. Its profits for the last 4 years were:
2015-16 = 40,000
2016-17 = 50,000
2017-18 = 48,000
2018-19 = 46,000
The business was looked after by the management. Remuneration from alternative employment
if not engaged in the business comes to 36,000 p.a. Find out the amount of goodwill, if it is valued
on the basis of 3 years purchase of the average net profit for the last 4 years.

4. The following particulars are available in respect of the business by Mr. Madhu.
a. Profits Earned: 2016-17 - 50,000; 2017-18 - 48,000; 2018-19 - 52,000
b. Profits of 2017-18 is reduced by 5,000 due to stock destroyed by fire and profits of 20161-17
included a non-recurring income of 3,000.
c. Profits of 2018-19 include 32,000 income on Investment.
d. The stock is not insured and it is thought Prudent to insure the stock in future. The Insurance
premium is estimated at 500 p.a.
 e. Fair remuneration to the Proprietor (Not taken in the calculation of profits) is Rs.10,000 p.a.
You are required to compute the value of goodwill on the basis of 2 years purchase of average
profits of the last 3 years.

5. The profits disclosed by Chaitra Ltd., for the past 5 years were as follows:
2014-15 - 40,000 (including abnormal profit Rs.5,000)
2015-16 - 50,000 (after charging abnormal loss Rs.10,000)
2016-17 - 45,000 (excluding Rs.5,000 insurance premium)
2017-18 - 60,000
2018-19 - 80,000 (including profit on sale of building Rs.20,000)
You are required to calculate the value of goodwill at 2 years purchase of average profits.

- WEIGHTED AVERAGE PROFIT METHOD:

6. Giri Ltd. proposed to purchase the business carried on by Mr.Srinivas. Goodwill for this purpose
is agreed to be valued at 3 years purchase of the weighted average profits of the past 4 years, the
appropriate weights to be used are:
2015-16 1
2016-17 2
2017-18 3
2018-19 4
The profits for these years are:
2015-16 = 1,01,000
2016-17 = 1,24,000
2017-18 = 1,00,000
2018-19 = 1,50,000
On a scrutiny of the accounts the following matters are revealed:
(a) On 1st April, 2019 a major repair was made in respect of the plant incurring 30,000 which
amount was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation
subject to adjustment of depreciation of 10% p.a. on reducing balance method.
(b) The closing stock for the year 2016-17 was over valued by 12,000.
(c) To cover management cost an annual charge of 24,000 should be made for the purpose of
goodwill valuation.
Compute the value of goodwill of the firm.

7. ABC Ltd. purchased the business of XYZ Ltd. Calculate Goodwill on the basis of 3 years purchase
of weighted average for 4 years. The appropriate weights are:
2015-16 = 1
2016-17 = 2.5
2017-18 = 3.8
2018-19 = 4.2.
Profits for these years were 340,500, 746,500, 60,000 and 75,000 respectively. On scrutiny of
accounts, the following aspects were revealed:
1. The company purchased new furniture on 30th September 2019 which was entered in purchase
day book. The value of furniture was 10,000. For the purpose of goodwill the error has to be
rectified and depreciation should be provided at 10% under value (WDV) method.
2. The opening stock of year 2017-14 was undervalued by 2,500.
3. Anticipated additional expenses in administration is 5,000 per annum.
8. Gary Ltd. proposed to purchase the business carried on by Success Ltd. Goodwill for was agreed
to be valued at 3 years' purchase of the weighted average profits of the past 4 years.
The appropriate weightages to be used are :
2015-16 = 1
2016-17 = 2
2017-18 = 3
2018-19 = 4
The profits for these years were:
2015-16 = 81,000
2016-17 = 95,000
2017-18 = 1,20,000
2018-19 = 1,50,000.
On a scrutiny of the accounts, the following were revealed :
(1) On 30-09-2018, a major repair was made in respect of machinery incurring 20,000 which
amount was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation
subject to adjustment of depreciation of 10% per annum by the Reducing Balance method.
(2) The closing stock for the year 2016-17 was undervalued by 5,000.
(3) To cover management expenses an annual charge of 10,000 should be made for the purpose
of goodwill valuation.
Compute the value of goodwill of the firm.

➢ CAPITALISATION METHOD:

- CAPITALISATION OF AVERAGE PROFIT:

9. The net profits of a company for the past 5 years are –

2014-15 = 40,000
2015-16 = 45,000
2016-17 = 47,000
2017-18 = 40,000
2018-19 = 48,000.
The capital employed in the business is 4,00,000 on which a reasonable rate of return of 10% is expected.
Calculate the goodwill of the company under the capitalisation of the average profits method.

10. A company desirous of selling its business to another company has earned an profit of 1,60,000 per
annum and the same amount of profit is likely to be earned in the future also, except that :
(1) Directors' fees of 12,000 per annum charged against such profits will not be payable by the purchasing
company whose existing Board can manage the new business also.
(2) Rent of 28,000 per annum which had been paid by the vendor company will not be incurred in the
future since the purchasing company owns its own premises and the necessary accommodation can be
provided.
The net assets, other than goodwill, were 18,00,000 and it was considered that a reasonable return on
investment in this type of business would be 10%.

- CAPITALISATION OF SUPER PROFIT:

11. Sri. Ram Rao has invested a sum of 3,00,000 in his own business which is a very profitable one.
The annual profit earned from his business is 60,000 which included a sum of 10,000 received as
compensation for acquisition of part of his business premises.
The money could have been invested in deposits for a period of 5 years at 10% interest and himself could
earn 37,200 per annum in alternative employment.
 Considering 2% as fair compensation for the risk involved in the business, calculate the value of goodwill
of his business on capitalisation of super profits at a normal rate of return of 12%.

➢ SUPER PROFIT METHOD:

12. From the following particulars relating to the business of Ashwini, Compute the value of the basis of three
years purchase of super profits taking average of last four years,
Fixed assets 8,00,000
Current assets 80,000
Current liabilities 1,60,000
Normal rate of return 15%
Managerial remuneration of employed elsewhere 10,000 p.a.
Profits for the last four years were 1,20,000, 1,40,000, 1,30,000 and 1,50,000 respectively.

13. The Net profit of a business after providing for taxation for the past five years are: 80,000, 92,000, 85,000,
1,05,000 and 1,18,000. The Capital Employed in the business is 8,00,000. The normal rate of return
expected in this type of business is 10%. It is expected that the company will be able to maintain its Super-
profit for the next 5 years.
Calculate the value of Goodwill on the basis of:
(a) 5 years purchase of Super-profit method.
(b) Capitalisation of Super-profit method.

14. Following is the balance sheet of Chandana Ltd. as on 31-03-2019.

Particulars Amount (Rs.) Particulars Amount (Rs.)
Share capital 30,00,000 Fixed assets 20,00,000
Reserves and surplus 7,50,000 Current assets 25,00,000
Creditors 12,50,000 Investments 5,00,000
50,00,000 50,00,000
The investments are 8% government bonds. The net profit after taxation for the past 4 years were
Rs.7,85,000; Rs.8,45,000; Rs.8,50,000 and Rs.8,60,000 respectively. Normal rate of return on average
capital employed is 20%.
Calculate goodwill at 3 years purchase of super profits.

15. From the following information calculate the value of goodwill under Super profits method:
(i) Average Capital Employed - 6,00,000
(ii) Net profits of the firm for the past 3 years were 1,07,600, 90,700 and 1,12,500.
(iii) Rate of interest expected from capital having regard to the risk involved - 12%.
(iv) Remuneration to partners for their services - 12,000 p.a.
(v) Assets of the firm - 7,54,762.
(vi) Current liabilities Rs.1,329.

16. The balance sheet of X Ltd as on 31-03-2019 is as follows:

Particulars Amount (Rs.) Particulars Amount (Rs.)
8%, 5,000 preference shares of
50,000 Goodwill 10,000
Rs.10 each
10,000 equity shares of Rs.10
1,00,000 Fixed assets 1,80,000
each
Reserves (including provision
1,00,000 Investments (5% govt bonds) 20,000
for taxation Rs.10,000)
8% debentures 50,000 Current assets 1,00,000
 Creditors 25,000 Preliminary expenses 10,000
3,25,000 Discount on debentures 5,000
3,25,000 3,25,000
The average profit of the company (after deducting interest on debentures and taxes) is Rs.31,000. The
market value of the machinery included in fixed assets is Rs.5,000 more. Expected rate of return is 10%.
Evaluate the goodwill of the company at five times of the super profits.

➢ ANNUITY METHOD ALONG WITH VARIOUS OTHER METHODS:

17. The net profits of a company after providing for taxation, for the past 5 years are: 40,000, 42,000, 45,000,
46,000, 47,000. The capital employed in the business is 4,00,000 on which a reasonable rate of return of
10% is expected.
It is expected that the company will be able to maintain its super profits for the next five years.
Calculate the value of the goodwill of business on the basis of
(i) annuity of super profits, taking the present value of an annuity of one rupee for five years at 10%
interest is Rs.3.78.
(ii) Capitalisation of Super-profit method.
(iii) 5 Years purchase of Super-profit method.

18. The Net Profit of a business, after providing for taxation, for the past five years are: 80,000, 85,000,
92,000, 1,05,000 and 1,18,000. The capital employed in the business is 8,00,000. The normal rate of return
expected in this type of business is 10%. It is expected that the company will be able to maintain its super-
profit for the next 5 years. Calculated the value of goodwill on the basis of:
(a) 5 years' purchase of super-profit method,
(b) Annuity method, taking the present value of annuity of Re. 1 for five years at 10% as Rs.3.78
(c) Capitalisation of super-profit method.

19. The following information is given:

(a) Capital Employed 1,50,000.
(b) Normal rate of return 10%
(c) Present value of annuity of Rs.1 for 5 years at 10% = 3.78.
(d) Net profits for five years: 2014-15 - 14,400.
2015-16 - 15,400
2016-17 - 17,400
2017-18 - 16,900
2018-19 - 17,900.
The profits included non-recurring profits on an average basis of Rs.1,000 out of which it was declined
that even non-recurring profits had a tendency of appearing at the rate of Rs.600 per annum. You are
required to Calculate Goodwill
(a) As per annuity method.
(b) As per 5 years purchase of Super-profit method.
(c) As per capitalisation of Super profit method.