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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"`
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संबंधित प्रश्न
Calculate value of goodwill on the basis of three years' purchase of average profit of the preceding five years which were as follows:
| Year | 2018-19 | 2017-18 | 2016-17 | 2015-16 | 2014-15 |
| Profits (₹) | 8,00,000 | 15,00,000 | 18,00,000 | 4,00,000 (Loss) |
13,00,000 |
Calculate the value of firm's goodwill on the basis of one and half years' purchase of the average profit of the last three years. The profit for first year was ₹ 1,00,000, profit for the second year was twice the profit of the first year and for the third year profit was one and half times of the profit of the second year.
Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2019 for 1/5th share in the future profits. For this purpose, goodwill is to be valued at 100% of the average annual profits of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were:
| Year Ended | Profit (₹) |
| 31st March, 2019 | 2,88,000; |
| 31st March, 2018 | 1,81,800; |
| 31st March, 2017 | 1,87,200; |
| 31st March, 2016 | 2,53,200. |
Calculate the value of goodwill.
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.
Abhay, Babu, and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years' purchase of the average profit of the last five years. These profits for the year ended 31st March were:
| Year | 2015 | 2016 | 2017 | 2018 | 2019 |
| Profit/(Loss) (₹) | 1,50,000 | 3,50,000 | 5,00,000 | 7,10,000 | (5,90,000) |
On 1st April 2018, a car costing ₹ 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. The interest of ₹ 10,000 on Non-trade Investments is a credit to income for the year ended 31st March 2018 and 2019.
Calculate the value of goodwill after adjusting the above.
Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3 : 2. They admit Kanika into partnership for 1/4th share in profit. Kanika brings in her share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2017 - Profit ₹ 50,000 (including profit on sale of assets ₹ 5,000).
2018 - Loss ₹ 20,000 (including loss by fire ₹ 30,000).
2019 - Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.
Profits of a firm for the year ended 31st March for the last five years were:
| Year Ended | 31st March, 2015 | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 |
| Profits (₹) | 20,000 | 24,000 | 30,000 | 25,000 | 18,000 |
Calculate value of goodwill on the basis of three years' purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2015, 2016, 2017, 2018 and 2019.
The total capital of the firm of Sakshi, Mehak and Megha is ₹ 1,00,000 and the market rate of interest is 15%. The net profits for the last 3 years were ₹ 30,000; ₹ 36,000 and ₹ 42,000. Goodwill is to be valued at 2 years' purchase of the last 3 years' super profits. Calculate the goodwill of the firm.
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.
Average profit earned by a firm is ₹ 7,50,000 which includes overvaluation of stock of ₹ 30,000 on an average basis. The capital invested in the business is ₹ 42,00,000 and the normal tare of return is 15%. Calculate goodwill of the firm on the basis of 3 time the super profit.
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.
Rajan and Rajani are partners in a firm. Their capitals were Rajan ₹ 3,00,000; Rajani ₹ 2,00,000. During the year 2018−19, the firm earned a profit of ₹ 1,50,000. Calculate the value of goodwill of the firm by capitalisation of super profit assuming that the normal rate of return is 20%.
The total capitalised value of a business is ₹ 1,00,000; assets are ₹ 1,50,000 and liabilities are ₹ 80,000. The value of goodwill as per the capitalisation method will be ___________.
From the following information, calculate the value of goodwill under the annuity method:
| Particulars | ₹ |
| Average profit | 14,000 |
| Normal Profit | 4,000 |
| Normal rate of return | 15% |
| Years of purchase of goodwill | 5 |
Present value of ₹ 1 for 5 years at 15% per annum as per the annuity table is 3.352
Calculate the value of goodwill at 2 years purchase of average profit when average profit is ₹ 15,000.
Goodwill is to be calculated at one and half years’ purchase of average profit of last 5 years. The firm earned profits during 3 years as ₹ 20,000 ₹ 18,000 and ₹ 9,000 and suffered losses of ₹ 2,000 and ₹ 5,000 in the last 2 years. The amount of goodwill will be:
What are the methods of valuation of goodwill?
Under this method, the value of goodwill is ascertained by deducting the actual capital employed (net assets) in the business from the capitalized value of the average profits on the basis of the normal rate of return.
