Valuation of Goodwill PDF

CMA Final- CFR VALUATION OF GOODWILL REVISION CA/CMA Santosh kumar
REVISION OF VALUATION OF GOODWILL

Meaning of Goodwill:-
Goodwill represents the capacity of the business to earn excess profit for a period of time over normal profit.
The popular measure of determining excess profit or super profit is the average maintainable profits less normal
profits
METHODS OF VALUATION OF GOODWILL:--There are following methods for valuing goodwill:

1. Simple/Average profit method;
2. Super profit method;
3. Annuity method;
4. Capitalization method.
1. Simple/Average Profit Method:- In this method, goodwill is valued on the basis of a certain number of years'
purchase of the average profits of the past few years.
Revision Question 1. Profits earned during last three years by X Ltd are as follows:
2021 --- 5,00,000

2022 --- 6,00,000
2023 --- 4,00,000
Calculate goodwill on the basis of two year’s purchase price by
(a) average profit method

(b) weighted average profit method (if weights are not given)
(c) weighted average profit method if weights given are 1,3,6 respectively.
Solution:
(a) Average profit method:
Average profit = Rs 5,00,000

Goodwill = 5,00,000 X 2 = Rs 10,00,000
(b) weighted average profit method (if weights are not given):
Year 2021 2022 2023 Total
Profits 5,00,000 6,00,000 4,00,000
Weight 1 2 3 6
Weighted profits 5,00,000 12,00,000 12,00,000 29,00,000
𝟐𝟗,𝟎𝟎,𝟎𝟎𝟎
Weighted average profit = = Rs 4,83,333
𝟔
Goodwill = 4,83,333 X 2 = 9,66,667
1 COCEDUCATION.COM ENQUIRY NO. 9999631597, 7303445575, 8448322142

(c) weighted average profit method (if weights are given):
Year 2021 2022 2023 Total
Profits 5,00,000 6,00,000 4,00,000
Weight 1 3 6 10
Weighted profits 5,00,000 18,00,000 24,00,000 47,00,000
𝟒𝟕,𝟎𝟎,𝟎𝟎𝟎
Weighted average profit = = Rs 4,70,000
𝟏𝟎
Goodwill = 4,70,000 X 2 = Rs 9,40,000
➢ IMPORTANT POINTS TO BE KEPT IN MIND:

While calculating average profits (Average future maintainable profit) for the purpose of valuation of goodwill certain
adjustments are made, which are as follows:
(a) All non-recurring and abnormal expenses and losses not likely to occur in the future are added back to profits.
(b) Non-recurring or casual income not likely to recur in future are deducted from such profits.
(c) Expenses and losses expected to occur in future are deducted from such profits, (e.g. increase in rent, managerial
remuneration etc.)
(d) All profits likely to accrue in the future are added.
Revision Question 2 (Weighted Average Profits Method) The following information is available about Big B Ltd.:
Profits for the last four years are: 2020 - Rs. 1,75,000; 2021-Rs. 2,25,000; 2022-Rs. 3,15,000; 2023-Rs. 4,50,000.
On going through the accounts of the company it was found that:
(a) Profits are before managerial remuneration of Rs. 50,000 in 2020; Rs. 70,000 in Rs. 2021; Rs. 80,000 in 2022 and
Rs. 1,00,000 in 2023.
(b) In 2020 there was a loss of Rs. 45,000 because of sudden floods in the nearby river.
(c) The closing stock of 2021 was overvalued by Rs. 35,000. However, in 2022 the opening stock was correctly valued.
(d) In 2022, there was a repair of 25,000 resulting in the improvement of plant. However, the amount spent was charged
to revenue. Now it is agreed to be capitalized for valuation of goodwill subject to a depreciation charge of 10% p.a. on
diminishing balance method.
Calculate the value of goodwill on the basis of 4 years' purchase of Future Maintainable profits of the business
calculated on weighted average profit of the last four years. The appropriate weights to be used for respective
years are: 2020-1; 2021-2; 2022-3; and 2023-4.

Solution: Computation of future maintainable profits:
(i) Adjusted Profit

2020 2021 2022 2023
Rs. Rs. Rs. Rs.
Profit (As Given) 1,75,000 2,25,000 3,15,000 4,50,000
Less : Managerial Remuneration (50,000) (70,000) (80,000) (1,00,000)
1,25,000 1,55,000 2,35,000 3,50,000
Add : Loss from floods 45,000 — — —
1,70,000 1,55,000 2,35,000 3,50,000
Less : Overvaluation of closing stock — (35,000) — —
1,70,000 1,20,000 2,35,000 3,50,000
Add : Repairs charged to
revenue account now
to be capitalized — — 25,000 —
1,70,000 1,20,000 2,60,000 3,50,000
Less : Depreciation on Rs. 25,000 at 10% — — (2,500) (2,250)
1,70,000 1,20,000 2,57,500 3,47,750
(ii) Weighted Average Profit = Adjusted Profit x Weight = Weighted Amount
2005 1,70,000 x 1 = 1,70,000

2006 1,20,000 x 2 = 2,40,000
2007 2,57,500 x 3 = 7,72,500
2008 3,47,750 x 4 = 13,91,000
25,73,500
Weighted Average Profit or Future Maintainable Profit = 25,73,500 ÷10 = 2,57,350
Goodwill = 2,57,350 x 4 = Rs. 10,29,400
2. Super Profit Method:

Goodwill = super profit X year’s purchase price
Super profit = average future maintainable profits – normal profit
Average profit = it should be only profit earn from the business operation and after tax.
Normal Profit:- average capital employed X normal rate of return

𝟏
Average capital employed = capital employed at the end – of current year/average profit
𝟐
OR
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 + 𝐜𝐥𝐨𝐬𝐢𝐧𝐠) 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐝
=
𝟐
Normal rate of return = Risk free return + Risk premium

Revision Question 3. Average profit after tax = 2,50,000
Average Capital employed = 20,00,000
Normal rate of return = 10%
Calculate goodwill on the basis of three year’s purchase of super profit.
Solution:
Average profit after Tax 2,50,000

Less: Normal profits (20,00,000 X 10%) -2,00,000
Super profit 50,000
Goodwill = 50,000 X 3 = 1,50,000
Important note on Capital Employed:- This represents net assets employed in the business. While
calculating capital employed following points will be considered:
• All assets except Goodwill, Non-trade investments and losses/expenses appearing in the balance sheet should be taken.
• Assets will be taken at current market prices.
• All Liabilities payable to outsiders, including claim of preference shareholders (preference share capital, any accrued
dividend on preference share) should be deducted.
• Dividend payable to equity shares (appearing in balance sheet) should not be deducted as it is part of current year's
profit.
• Funds/Reserves in the nature of liability should be deducted e.g. provident fund, Workers profit sharing fund, Gratuity
fund.
Revision question 4: The balance sheet of X Ltd. as at 31.03.2024 is as follows:
Liabilities Rs. Assets Rs.

8% 5,000 Preference Shares Goodwill 10,000
of Rs. 10 each 50,000 PPE 1,80,000
10,000 Equity Shares of Investments 20,000
Rs. 10 each 1,00,000 (5% Government Loan)
Reserves (including provision Current Assets 1,00,000
for taxation Rs. 10,000) 1,00,000 Preliminary Expenses 10,000
2% Debentures 50,000 Discount on Debentures 5,000
Creditors 25,000
3,25,000 3,25,000
The average profit of the company (before deducting interest on debentures and taxes) is Rs. 31,000. The market
value of the machinery included in the PPE is Rs. 5,000 more. Expected rate of return is 10%. Calculate the value of
goodwill at three times of the super profits.

Solution: (i) computation of average profit :
Average profit before interest and tax = Rs 31,000
Less: Interest on non-trade investment = Rs 1,000
Less: interest on debentures = Rs 1,000
Profit before tax 29,000
Less: provision for tax 10,000
Profit after tax 19,000
Less : dividend on preference shares 4,000
Profit after tax and preference dividend 15,000
(ii) computation of capital employed at the end:
PPE(1,80,000 +5,000) 1,85,000
Current assets 1,00,000
2,85,000
Less: creditors - 25,000
Less: debentures - 50,000
Less: provision for tax - 10,000
2,00,000
Less: claim of preference shares 50,000
Capital employed at end 1,50,000

𝟏
(iii) average capital employed = 1,50,000 – 𝟐 X 16,000 = 1,42,000
(Iv) Super profit = 15,000 – ( 1,42,000 X 10%)
= Rs 800
(v) Goodwill = 800 X 3 = Rs 2,400
3. Capitalisation method:-
(a) capitalisation of super profit
(b) capitalisation of average profit.

(a) Capitalisation of super profit method:

Step 1: calculate super profit as discussed above
Step 2: Goodwill will be equal to capitalised value super profit:

𝒔𝒖𝒑𝒆𝒓 𝒑𝒓𝒐𝒇𝒊𝒕
Goodwill = 𝒏𝒐𝒓𝒎𝒂𝒍 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒓𝒆𝒕𝒖𝒓𝒏 X 100
(b) capitalisation of average profit.

Step 1: Calculate capitalised value of firm by applying following formula:
𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒑𝒓𝒐𝒇𝒊𝒕
𝒏𝒐𝒓𝒎𝒂𝒍 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒓𝒆𝒕𝒖𝒓𝒏
X 100
Step 2: Calculate net assets (at the end) at market value
Step 3: Goodwill = Step 1 – Step 2.
Revision question 5: Average capital employed Rs 7,00,000
Net assets at end = Rs 6,00,000
Average profit = Rs 1,00,000.
Normal expected return= 10%
Calculate goodwill by capitalization of average profit method

𝟏𝟎𝟎
Solution: capitalised value of firm = 𝑿 𝟏, 𝟎𝟎, 𝟎𝟎𝟎 = 10,00,000
𝟏𝟎
Less : Capital employed ( net assets) at the end = 6,00,000
Goodwill 4,00,000
Revision question 6: (Annuity Method)
The following particulars are available in respect of the business carried on by a trader:
Average profit = Rs 55,000

Average capital employed = Rs. 3,00,000
Present value of an annuity of one rupee for 5 years at 10% = Rs. 3.78.
You are required to calculate the value of goodwill by annuity of super profit method.
Solution:
Super profit = 55,000 – 30,000
= Rs 25,000.
Goodwill = 25,000 X 3.78
= Rs 94,500

Revision question 7: From the following information ascertain the value to goodwill of X Ltd. under super
profit method at 3 years purchase price.
Balance Sheet as on 31st March, 2024
Equity and Liabilities ₨ Assets ₨

Paid-up capital Goodwill at cost 50,000
(5,000, shares of ₨ 100 each) fully paid 5,00,000 Land and buildings 2,20,000
Bank overdraft 1,16,700 Plant and machinery 2,00,000
Sunday creditors 1,81,000 Stock in trade 3,00,000
Provision for taxation 39,000 Book debts less provision for bad debts 1,80,000
Profit and loss Account 1,13,300
9,50,000 9,50,000
The company commenced operation in 2018 with a paid-up capital of ₨ 5,00,000. Profit for recent years (after
taxation) have been as follows:
Year ended 31st March
2020(19-20) 40,000 (loss)

2021(20-21) 88,000
2022(21-22) 1,03,000
2023(22-23) 1,16,000
2024(23-24) 1,30,000
(I) The loss in 2020 occurred due to a prolonged strike. The income-tax paid so far has been at the average rate of
40%, but it is likely to be 50% from April 2024 onwards.
(II) Dividends were distributed at the rate of 10% on the paid up capital in 2021 and 2022 and at the rate of 15%
in 2023 and 2024. The market price of shares is ruling at ₨ 125 at the end of the year ended 31 st March, 2024.
(III) Profit till 2024 have been ascertained after debiting ₨ 40,000 as remuneration to the director. The company
has approved a remuneration of ₨ 60,000 with effect from 1 st April, 2024.
(IV) The company has been able to secure a contract at an advantageous price thereby it can save materials worth
₨ 40,000 per annum for the next five years.

Solution:
(i) Computation of average maintainable profit :
Average profit of last 4 normal years after tax @ 40% = 1,09,250

𝟏,𝟎𝟗,𝟐𝟓𝟎
Add: Tax @ 40% ( X 40) 72,833
𝟔𝟎
Average profit before tax 1,82,083
Less : increase in remuneration - 20,000
Add: saving in material cost + 40,000
Profit before tax 2,02,083
Less: tax (2,02,083 X 50%) - 1,01,042
1,01,041
(ii) Computation of capital employed at end:
Assets at market value:
Land & building 2,20,000
Plant & machinery 2,00,000
Stock 3,00,000
Debtors 1,80,000
Less: liabilities at payable value:
Bank overdraft - 1,16,700
Creditors - 1,81,000
Provision for tax - 39,000
Capital employed at the end 5,63,300
Add: dividend paid for 23-24 75,000
Less: ½ of current year profit - 65,000
Average capital employed 5,73,300
(iii) Computation of normal rate of return:

𝟏𝟎+𝟏𝟎+𝟏𝟓+𝟏𝟓
Average rate of dividend = = 12.5%
𝟒
Dividend/share = 12.5% X 100 = Rs 12.5

𝟏𝟐.𝟓
Normal rate of return =
𝟏𝟐𝟓
𝑿 𝟏𝟎𝟎 = 10%
(iv) computation of normal profit: 5,73,300 X 10% = Rs 57,330
(v) Super profit = average profit – normal profit
= 1,01,041 - 57,330

= Rs 43,711
(vi) Goodwill = 43,711 x 3
= Rs 1,31,133
IMPORTANT NOTE:
1. Meaning of current year profit for the purpose of computation of average capital employed:
➢ It should be taken as current year profit after tax and preference dividend after making all errors rectified(if any)
2. Goodwill( purchased or self generated) appearing in balance sheet will never been taken into consideration
for calculating capital employed.
Revision question 8: Following is the Balance Sheet of Z Ltd. as on 31st March, 2024:
Liabilities (RS) Assets (Rs)

1,00,000 Equity Shares of 10 each 10,00,000 Preliminary expenses 5,00,000
10,000 12% Preference Shares of 100 each 10,00,000 Goodwill 15,00,000
General Reserve 6,00,000 Buildings 10,00,000
Profit and Loss Account 4,00,000 Investment in 10% Stock 4,80,000
15% Debentures 10,00,000 Plant 6,00,000
Creditors 8,00,000 Stock-in - trade 4,00,000
Debtors 2,20,000
Cash 1,00,000
48,00,000 48,00,000
Additional information are given below:

(a) Nominal value of investment is Rs 5,00,000 and its market value is Rs 5,20,000.
(b) Following assets are revalued:
(i) Building 32,00,000
(ii) Plant 18,00,000
(iii) Stock-in-trade 4,50,000
(iv) Debtors 3,60,000
(c) Average profit before tax of the company is Rs 12,00,000 and 12.50 % of the profit is transferred to
general reserve, rate of taxation being 50%.
(d) Normal dividend expected on equity shares is 8% while fair return on closing capital employed is 10%.
Goodwill may be valued at three year’s purchase of super profits.

Solution:
1. Calculation of Capital Employed at end
Assets: (Rs)
Buildings 32,00,000
Plant 18,00,000
Stock 4,50,000
Debtors 3,60,000
Cash 1,00,000
59,10,000
Less: Liabilities:
Creditors 8,00,000
10,000 12% Preference Shares of Rs 100 each 10,00,000
Debentures 10,00,000 28,00,000
Total Capital Employed 31,10,000
2. Calculation of Actual Profit

Average Profit before Tax (given) 12,00,000
Less: Income from Investment (5,00,000 × 10%) 50,000
11,50,000
Less: Income Tax @ 50% 5,75,000
Preference dividend 1,20,000
Actual Profit 4,55,000
4. Normal Profit:
10% of closing Capital Employed
= 10% of 31,10,000 = 3,11,000
5. Super Profit = Actual Profit – Normal Profit
= 4,55,000 – 3,11,000 = 1,44,000
6. Goodwill = 1,44,000 × 3 = 4,32,000

Practice question 9: June 2023 attempt(Syllabus 2022/2016)

Given below are the extract from the Balance sheet of GINGER TULSI Ltd as at 31 st March,2023:
Particulars Rs
1,00,000 equity shares of Rs 10 each 10,00,000
6,00,000 Equity Shares of Rs 5 each fully paid up 30,00,000
Less: Calls in arrear on 2,00,000 shares (4,00,000)
12% preference shares of Rs 100 each 10,00,000
Reserves and surplus 20,00,000
10% Debentures (60% Debentures are to be redeemed prior to valuation of goodwill) 20,00,000
Current liabilities 10,00,000
Goodwill 4,00,000
10% trade investments (Face value Rs 8,00,000) 10,00,000
Additional information: Profit before tax %@40: 2020-21- Rs 12,00,000; 2021-22- Rs 18,00,000, 2022-23- Rs
15,00,000. With effect from the next year, rate of income tax will be 25% and an increase in manager remuneration
Rs 4,44,000 P.a. Normal rate of return on net assets for equity shareholders is 8%. Trade investments are to be
valued at 275% of face value. Goodwill is to be valued at 3 year’s purchase of super profit.
Solution:
Capital + liability Amount Assets Amount
Equity share capital (1,00,000 of Rs 10 each) 10,00,000 Goodwill 4,00,000
Equity share capital 10% trade investment 10,00,000
6,00,000 shares of Rs 5 each 30,00,000 (Face value 8,00,000)
Calls in arrear -4,00,000 26,00,000 Other assets ( bal fig) 82,00,000
12% preference share capital 10,00,000

Reserve and surplus 20,00,000
10% debentures 20,00,000
Current liabilities 10,00,000
96,00,000 96,00,000
(1) Computation of value of goodwill:

Goodwill = Super profit X Year’s purchase price
= 10,00,000 X 3
= 30,00,000

Super profit = Average profit – Normal profit

= 15,12,000 – 5,12,000
= 10,00,000
(a) Computation of average maintainable profit
19-20 20-21 21-22
Profit after tax (given) 12,00,000 18,00,000 15,00,000
Profit before tax 𝟏𝟐,𝟎𝟎,𝟎𝟎𝟎 30,00,000 25,00,000
20,00,000 ( 𝒙𝟏𝟎𝟎)
𝟔𝟎
+1,20,000
Add: Interest on debenture +1,20,000 +1,20,000
-4,44,000
Less: Managerial remuneration -4,44,000 -4,44,000
Maintainable profit before tax 16,76,000 26,76,000 21,76,000
Less: Tax @ 25% -4,19,000 -6,69,000 -5,44,000
Maintainable profit after tax 12,57,000 20,07,000 16,32,000
Less: dividend on preference shares -1,20,000 -1,20,000 -1,20,000
Maintainable profit for equity 11,37,000 18,87,000 15,12,000
Average maintainable profit 𝟏𝟕,𝟑𝟕,𝟎𝟎𝟎+𝟏𝟖,𝟖𝟕,𝟎𝟎𝟎+𝟏𝟓,𝟏𝟐,𝟎𝟎𝟎

𝟑
= 15,12,000
(b) Computation of normal profit:

(i) Computation of net assets for equity shareholders:
10% trade investment 22,00,000
Other assets (82,00,000- 12,00,000) 70,00,000
92,00,000
Less: Current liabilities (10,00,000)
10% debentures (20,00,000- 12,00,000) (8,00,000)
12% preference share capital (10,00,000)
Net assets for equity shareholders 64,00,000

Normal profit (64,00,000 X 8%) 5,12,000

Revision question 10: ( December 2023 attempt- syllabus 2022)The following figures have been extracted from
the balance sheet of R Ltd as on 31-03-2023:
Particulars Rs
1,12,000 equity shares of Rs 10 each 11,20,000
2,800, 13% preference shares of Rs 100 each 2,80,000
Other equity (Retained earnings and reserves) 7,00,000
12% debentures (Rs 100) 2,80,000
Trade payable 1,40,000
Total equity and liabilities 25,20,000
Property, plant and equipment 16,80,000
Goodwill 1,40,000
Non-current investments (Non-trading) 1,40,000
Total assets 25,20,000
Additional information:
(i) Profit before tax for the year 2022-23 amounted to Rs 8,40,000 including Rs 14,000 as interest on investment.
(ii) An additional amount of Rs 70,000 p.a. shall be required to be spent for smooth running of the business.
(iii) Market value of property, plant and equipment are estimated at Rs 26,60,000. In order to match the above
figures, a further depreciation to the extent of Rs 56,000 should be taken into consideration (additional
depreciation is not tax deductible).
(iv) income tax rate is 50%.
(v) Return on capital @ 20% before tax may be considered normal for this business at the present stage.
(vi) For the purpose of determining the rate of return, the profit for this year after the aforesaid adjustments may
be taken as the expected average profit. Consider average trading capital employed for determining the normal
profit.
Based on the above details, you are required to compute the value of goodwill based on the 4 year’s purchase of
super profit. Working should form part of your answer. (7 marks)

Solution: Computation of future maintainable profit:
Particulars Amount
Profit before tax 8,40,000

Less: Interest on non-trade Investment -14,000
Less: Additional expense -70,000
7,56,000
Tax expense @ 50% -3,78,000
3,78,000
Less: Additional depreciation -56,000
3,22,000
Less: Dividend on preference shares (2,80,000 x 13%) -36,400
Future maintainable profit for equity 2,85,600
Computation of average capital employed:
PPE 26,60,000
Total assets 32,20,000

Less: Trade payable -1,40,000
Less: 12% debentures -2,80,000
Less: 13% Preference share capital -2,80,000

𝟏
Less: X Current year profit for equity -1,88,300
𝟐
𝟏
X [8,40,000-14,000)- (8,26,000 x 50%)-36,400]
𝟐
𝟏
( X 3,76,600]
𝟐
Normal profit = 23,31,700 X 10% 2,33,170
Computation of super profit= Average profit – Normal profit

= 2,85,600 – 2,33,170
= 52,430
Goodwill = 52,430 X 4
= Rs 2,09,720

Practice question 11: (December 2023- syllabus 2016) The following is the summarised balance sheet of J Ltd as
on 31-03-2023:
Particulars Amount
1. Assets
(1) Non-current assets:
(a) Property, plant and equipment 5,40,000
(b) Non-current investment ( Face value Rs 2,00,000) 3,00,000
(2) Current Assets:
(a) Inventories 1,60,000
(b) Trade receivables: debtors 1,80,000
(c) Cash and cash equivalents: Bank 2,60,000
Total 14,40,000
II. Equity and liabilities

(1) Equity
(a) Share capital 8,00,000
(b) other Equity 2,60,000
(2) Non-current liabilities Nil
(3) current liabilities
(a) trade payable: sundry creditors 2,40,000
(b) short term provisions 1,40,000
Total 14,40,000
Additional information:
(i) The net profits of the company after tax were-
2020-21 – Rs 5,04,000; 2021-22- Rs 4,53,600; 2022-23: Rs 4,62,000
(ii) Of the investment, 80% is non-trading and the balance is trading investment by nature. All trade investments
are to be valued at 20% below cost. A uniform rate of dividend of 10% is earned on all investments.
(iii) Having regard to the type of business, a 10% return on capital employed is considered as reasonable.
(iv) assume tax rate at 30%. Ascertain the value of goodwill on the basis of three year’s purchase of annual super
profits. For this purpose, average operating capital employed is to be considered for goodwill valuation.

Solution:
(i) Computation of average maintainable profits:
2020-21 2021-22 2022-23
Profit after tax 5,04,000 4,53,600 4,62,000

Less: interest on non-trade investment (16,000 x 70%) -11,200 -11,200 -11,200
4,92,800 4,42,400 4,50,800
Average maintainable profit 4,62,000
(ii) computation of average capital employed:
Property, plant and equipment 5,40,000

Trade investment 48,000
Inventories 1,60,000
Debtors 1,80,000
Cash 2,60,000
Total 11,88,000
Less: creditors 2,40,000
Less: short term provisions 1,40,000

𝟏
Less: of 4,50,800 -2,25,400
𝟐
Normal profit (10% of 5,82,600) 58,260
(iii) super profit = 4,62,000 – 58,260

= Rs 4,03,740
(iv) Goodwill = 4,03,740 X 3

= Rs 12,11,220

Practice question 12 (Model question paper June 2024- 1(v)) The following details relates to M/s XYZ, a firm:
Average profit of last four years = Rs 7,00,000
Average capital employed by the firm = Rs 55,00,000
Present value of annuity of Rs 1 for 4 years @ 10% = 3.1699
Determine the value of goodwill on the basis of annuity of super profit.
Solution:
Normal profit = (55,00,000 x 10%) = Rs 5,50,000
Super profit = 7,00,000 – 5,50,000 = Rs 1,50,000
Goodwill = 1,50,000 X 3.1699 = Rs 4,75,485
Practice question 13 (Model question paper June 2024- 1(xiii)):

XY Ltd a partnership firm, earned profit during the last 5 years as follows:
Year 2017 2018 2019 2020 2021
Profits 27,000 36,000 37,200 42,000 46,800
Determine the value of goodwill on the basis of 3 year’s purchase of weighted average profits of last five years
giving maximum weightage to the recent results:
Solution:
Year 2017 2018 2019 2020 2021 Total
Profits 27,000 36,000 37,200 42,000 46,800
Weight 1 2 3 4 5 15
Weighted profits 27,000 72,000 1,11,600 1,68,000 2,34,000 6,12,600
𝟔,𝟏𝟐,𝟔𝟎𝟎
Weighted average profit = = 40,840
𝟏𝟓
Goodwill = 40,840 X 3 = Rs 1,22,520

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CMA Final- CFR VALUATION OF GOODWILL REVISION CA/CMA Santosh kumar

REVISION OF VALUATION OF GOODWILL

METHODS OF VALUATION OF GOODWILL:--There are following methods for valuing goodwill:

2021 --- 5,00,000

Calculate goodwill on the basis of two year’s purchase price by

(a) average profit method

Average profit = Rs 5,00,000

Year 2021 2022 2023 Total

Profits 5,00,000 6,00,000 4,00,000

Weighted profits 5,00,000 12,00,000 12,00,000 29,00,000

Goodwill = 4,83,333 X 2 = 9,66,667

1 COCEDUCATION.COM ENQUIRY NO. 9999631597, 7303445575, 8448322142

(c) weighted average profit method (if weights are given):

Year 2021 2022 2023 Total

Profits 5,00,000 6,00,000 4,00,000

Weighted profits 5,00,000 18,00,000 24,00,000 47,00,000

Goodwill = 4,70,000 X 2 = Rs 9,40,000

➢ IMPORTANT POINTS TO BE KEPT IN MIND:

2 COCEDUCATION.COM ENQUIRY NO. 9999631597, 7303445575, 8448322142

Solution: Computation of future maintainable profits:

(i) Adjusted Profit

(ii) Weighted Average Profit = Adjusted Profit x Weight = Weighted Amount

2005 1,70,000 x 1 = 1,70,000

Weighted Average Profit or Future Maintainable Profit = 25,73,500 ÷10 = 2,57,350

Goodwill = 2,57,350 x 4 = Rs. 10,29,400

2. Super Profit Method:

Super profit = average future maintainable profits – normal profit

Normal Profit:- average capital employed X normal rate of return

Normal rate of return = Risk free return + Risk premium

3 COCEDUCATION.COM ENQUIRY NO. 9999631597, 7303445575, 8448322142

Revision Question 3. Average profit after tax = 2,50,000

Average Capital employed = 20,00,000

Normal rate of return = 10%

Calculate goodwill on the basis of three year’s purchase of super profit.

Average profit after Tax 2,50,000

Goodwill = 50,000 X 3 = 1,50,000

Revision question 4: The balance sheet of X Ltd. as at 31.03.2024 is as follows:

Liabilities Rs. Assets Rs.

4 COCEDUCATION.COM ENQUIRY NO. 9999631597, 7303445575, 8448322142

Solution: (i) computation of average profit :

Average profit before interest and tax = Rs 31,000

Less: Interest on non-trade investment = Rs 1,000

Less: interest on debentures = Rs 1,000

Profit before tax 29,000

Less: provision for tax 10,000

Profit after tax 19,000

Less : dividend on preference shares 4,000

Profit after tax and preference dividend 15,000

(ii) computation of capital employed at the end:

PPE(1,80,000 +5,000) 1,85,000

Current assets 1,00,000

Less: creditors - 25,000

Less: debentures - 50,000

Less: provision for tax - 10,000

Less: claim of preference shares 50,000

Capital employed at end 1,50,000

(Iv) Super profit = 15,000 – ( 1,42,000 X 10%)

(v) Goodwill = 800 X 3 = Rs 2,400

(b) capitalisation of average profit.