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प्रश्न
Explain various methods of valuation of goodwill.
उत्तर
The following are the various methods of valuation of goodwill.
1. Average Profit Method: Under this method, goodwill is calculated on the average basis of the profits of past few years. The formula for calculating goodwill is:
Goodwill = Average Profit × No. of Years Purchase
Average Profit = `"Total Profit of Past Given Years"/"Number of Years"`
Number of Years Purchase implies number of years for which the firm expects to earn the same amount of profits.
Steps to Calculate Goodwill by Average Profit Method:
Step 1: Ascertain the total profit of past given years.
Step 2: Add all abnormal losses like, loss by fire, theft etc.
Step 3: Add all normal income, if not added previously.
Step 4: Less all non-business incomes and all abnormal gains and incomes like, speculation, lottery etc.
Step 5: Less all normal expenses, if not deducted previously.
Step 6: Calculate Average Profit, by dividing the total profit ascertained in Step 5 by number of years.
Step 7: Multiply the Average Profit to the Number of Year’s Purchases to calculate the value of goodwill.
Example:
The profits for last 5 years are 1,00,000, 3,00,000, (2,00,000), 5,00,000, 8,00,000.
Calculate goodwill on the basis of 4 years purchase
Average Profit = `[1,00,000 + 3,00,000 + 5,00,000 + 8,00,000 - 2,00,000]/5`
= `[15,00,000]/5` = Rs. 3,00,000
Goodwill = 3,00,000 x 4 years = Rs. 12,00,000.
2. Weight Average Method: It is modified version of the Average Profit Method. Under this method, the weights are assigned for each year’s profit. Highest weights are assigned to the recent year’s profit and lower weights are assigned to the past year’s profits. The products of the profits and the weights are added and divided by the total weights to calculate Weighted Average Profits. The formula for calculating goodwill by this method is:
Weighted Average Profit = `"Total Products of Profits"/"Total of Weights"`
Goodwill = Weighted Average Profit x Number of Years Purchase
Steps to Calculate Goodwill by Weight Average Method:
Step 1: Assign highest weights to the recent year’s profit and lower weights to the past year’s profits, like 4,3,2,1.
Step 2: Multiply the weights with its corresponding year’s profits.
Step 3: Calculate the total of the products
Step 4: Divide the total of the product by the total of the eights in order to calculate Weighted Average Profit.
Step 5: Multiply the Weighted Average Profit by the number of years purchase.
For example:
The profits for the last 5 years are Rs 1,00,000, Rs 3,00,000, Rs (2,00,000), Rs 5,00,000, Rs 8,00,000.
Calculate goodwill on the basis of 4 years purchase
|
Profit/Loss Rs |
Weights |
Product Rs |
|
1,00,000 |
1 |
1,00,000 × 1 = 1,00,000 |
|
3,00,000 |
2 |
3,00,000 × 2 = 6,00,000 |
|
(2,00,000) |
3 |
(2,00,000) × 3 = (6,00,000) |
|
5,00,000 |
4 |
5,00,000 × 4 = 20,00,000 |
|
8,00,000 |
5 |
8,00,000× 5 = 40,00,000 |
|
Total |
15 |
Rs 61,00,000 |
Weighted Average Profit = `61,00,000/15` = Rs. 4,06,666.67
Goodwill = 4,06,666.67 x 4 = Rs. 16,26,668.
3. Super Profit Method: Under this method, goodwill is calculated on the basis of excess profit earned by a firm over the normal profit earned by its counterparts in the same industry. The excess profit over the normal profit is termed as Super Normal Profit.
Steps to Calculate Goodwill by Super Profit Method:
Step 1: Calculate Average Profit
Step 2: Calculate Average Capital Employed as:
Average Capital Empolyed = `"Opening Capital Employed" + "Closing Capital Employed"/2`
Step 3: Calculate Normal Profit by the formula:
Normal Profit = Average Capital empolyed x `"Normal Rate of Return"/100`
Step 4: Calculate Super Normal Profit by the formula:
Super Normal Profit = Average Profit – Normal Profit
Step 5: Multiply the Super Normal Profit by the Number of Years Purchase to calculate goodwill.
4. Capitalisation Method: Under this method, goodwill is calculated by the following two methods :
a) By capitalisation of Average Profit.
b) By capitalisation of Super Profit.
a) Capitalisation of Average Profit
Step 1: Calculate Average Profit
Step 2: Calculate Capitalised value of Average Profit by the following formula:
Capitalised value of Average Profit = Average Profit x `100/"Normal Rate of Return"`
Step 3: Ascertain Actual Capital Employed
Step 4: Deduct Actual Capital Employed from Capitalised Average Profit to calculate goodwill.
Goodwill = Capitalised Average Profit – Actual Capital Employed
b) Capitalisation of Super Profit
Step 1: Calculate the Capital Employed
Step 2: Calculate Normal Profit by the following formula:
Normal Profit = Average Capital Employed x "Normal Rate Of Return"/100`
Step 3: Calculate Average Profit.
Step 4: Calculate Super Normal Profit by the following formula:
Super Normal Profit = Average Profit – Normal Profit
Step 5: Calculate goodwill by the following formula:
Goodwill = Super Profit x `100/"Normal Rate Return"`
APPEARS IN
संबंधित प्रश्न
Divya purchased Jyoti's business with effect from 1st April, 2019. Profits shown by Jyoti's business for the last three financial years were:
| 2016-17 | ₹ 1,00,000 (including an abnormal gain of ₹ 12,500). |
| 2017-18 | ₹ 1,25,000 (after charging an abnormal loss of ₹ 25,000). |
| 2018-19 | ₹ 1,12,500 (excluding ₹ 12,500 as insurance premium on firm's property- now to be insured). |
Calculate the value of firm's goodwill on the basis of two year's purchase of the average profit of the last three years.
Sumit purchased Amit's business on 1st April, 2019. Goodwill was decided to be valued at two years' purchase of average normal profit of last four years. The profits for the past four years were:
| Year Ended | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 |
| Profits (₹) | 80,000 | 145,000 | 160,000 | 200,000 |
Books of Account revealed that:
(i) Abnormal loss of ₹ 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2016.
(ii) A fixed asset was sold in the year ended 31st March, 2017 and gain (profit) of ₹ 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2018 assets of the firm were not insured due to oversight. Insurance premium not paid was ₹ 15,000.
Calculate the value of goodwill.
Geet and Meet are partners in a firm. They admit Jeet into partnership for equal share. It was agreed that goodwill will be valued at three years' purchase of average profit of last five years. Profits for the last five years were:
| Year Ended | 31st March, 2015 | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 |
| Profits (₹) | 90,000 (Loss) |
1,60,000 | 1,50,000 | 65,000 | 1,77,000 |
Books of Account of the firm revealed that:
(i) The firm had gain (profit) of ₹ 50,000 from sale of machinery sold in the year ended 31st March, 2016. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of ₹ 20,000 incurred in the year ended 31st March, 2017 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2017 amounting to ₹ 1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.
Calculate the value of goodwill.
Average net profit expected in future by XYZ firm is ₹ 36,000 per year. Average capital employed in the business by the firm is ₹ 2,00,000. The normal rate of return from capital invested in this class of business is 10%. Remuneration of the partners is estimated to be ₹ 6,000 p.a. Calculate the value of goodwill on the basis of two years' purchase of super profit.
A business earned an average profit of ₹ 8,00,000 during the last few years. The normal rate of profit in the similar type of business is 10%. The total value of assets and liabilities of the business were ₹ 22,00,000 and ₹ 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at `2 1/2` years' purchase of super profits.
From the following information, calculate value of goodwill of the firm by applying Capitalisation Method: Total Capital of the firm ₹ 16,00,000.
Normal rate of return 10%. Profit for the year ₹ 2,00,000.
Average profit earned by a firm is ₹ 1,00,000 which includes undervaluation of stock of ₹ 40,000 on an average basis. The capital invested in the business is ₹ 6,30,000 and the normal rate of return is 5%. Calculate goodwill of the firm on the basis of 5 times the super profit.
A business has earned average profit of ₹ 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method, and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profits.
Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
A firm earns profit of ₹ 5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsiders' liabilities as on the date of goodwill are ₹ 55,00,000 and ₹ 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.
Average profit of the firm is ₹ 2,00,000. Total assets of the firm are ₹ 15,00,000 whereas Partners' Capital is ₹ 12,00,000. If normal rate of return in a similar business is 10% of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?
From the following information, calculate value of goodwill of the firm:
(i) At three years' purchase of Average Profit.
(ii) At three years' purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average profit.
Information:
(a) Average Capital Employed is ₹ 6,00,000.
(b) Net Profit/(Loss) of the firm for the last three years ended are:
31st March, 2018 − ₹ 2,00,000, 31st March, 2017 − ₹ 1,80,000, and 31st March, 2016 − ₹ 1,60,000.
(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of ₹ 1,00,000 to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) is ₹ 7,00,000 whereas Partners' Capital is ₹ 6,00,000 and Outside Liabilities ₹ 1,00,000.
Identify the incorrect pair
Book profit of 2017 is ₹ 35,000; non-recurring income included in the profit is ₹ 1,000 and abnormal loss charged in the year 2017 was ₹ 2,000, then the adjusted profit is ____________.
From the following information relating to a partnership firm, find out the value of its goodwill based on 3 years purchase of average profits of the last 4 years:
- Profits of the years 2015, 2016, 2017 and 2018 are ₹ 10,000, ₹ 12,500, ₹ 12,000 and ₹ 11,500 respectively.
- The business was looked after by a partner and his fair remuneration amounts to ₹ 1,500 per year. This amount was not considered in the calculation of the above profits.
The following particulars are available in respect of the business carried on by a partnership firm:
- Profits earned: 2016: ₹ 25,000; 2017: ₹ 23,000 and 2018: ₹ 26,000.
- Profit of 2016 includes a non-recurring income of ₹ 2,500.
- Profit of 2017 is reduced by ₹ 3,500 due to stock destroyed by fire.
- The stock was not insured. But, it is decided to insure the stock in the future. The insurance premium is estimated to be ₹ 250 per annum.
You are required to calculate the value of goodwill of the firm on the basis of 2 years purchase of average profits of the last three years.
Find out the value of goodwill by capitalising super profits:
- Normal Rate of Return 10%
- Profits for the last four years are ₹ 30,000, ₹ 40,000, ₹ 50,000 and ₹ 45,000.
- A non-recurring income of ₹ 3,000 is included in the above mentioned profit of ₹ 30,000.
- Average capital employed is ₹ 3,00,000.
Name the method under which the goodwill is valued at the agreed number of 'years' purchase of the average profits of the past few years?
The books of a business showed that the capital employed on December 31, 2006, Rs. 5,00,000 and the profits for the last five years were: 1997 Rs. 40,000: 1998 - Rs. 50,000; 1999 - Rs. 55,000; 2000 - Rs. 70,000 and 2001 - Rs. 85,000. You are required to find out the value of goodwill based on 3 years of the purchase of the super-profits of the business, given that the normal rate of return is 10%.
