VALUATION OF GOODWILL
Q. 1:
From the information given below, calculate goodwill as per Capitalisation of Average Profits method :
(i) Capital employed
₹ 14,00,000
(ii) Normal rate of profit
10%
(iii) Net profits before taxation (tax rate 40%) :
1st year : ₹ 2,20,000;
2nd year : ₹ 2,80,000
3rd year : ₹ 2,60,000;
4th year : ₹ 3,00,000
5th year : ₹ 2,75,000.
(iv) Non-trading income ₹ 10,000 and Debenture interest ₹ 20,000 on an average included in the P & L
A/c.
Q. 2:
The following are the particulars about Gupta & Co. a partnership firm :
(a) Average Capital employed in the business is ₹ 7.00.000.
(b) Net Trading Profit of the firm for the past three years :
₹ 1,07,600, ₹ 90,700 and ₹ 1,12,500.
(c) Market rate of interest on investments 8%.
(d) Rate of risk return on capital invested in business 2%.
(e) Fair remuneration to the partners for their services : ₹ 12,000 per annum.
(f) The profit included non-recurring profits on average basis of ₹ 1,000 out of which it was considered that even
non-recurring profits had tendency to be recurring at an average rate of ₹ 600 per year.
(g) Sunday Assets of the firm ₹ 7,50,000 and Current Liabilities is ₹ 30,000.
Ascertain the value of goodwill of the firm under the following methods :
(i) Three years' Purchase of Super Profit Method.
(ii) Capitalisation Method.
Ignore taxation.
Q. 3:
The Balance Sheets of ABC Ltd. for 2017 and 2018 disclose the following position :
2017
2018
₹
₹
Paid up Capital—
Land & Buildings
Equity Shares
1,00,000 1,50,000 Plant & Machinery
8% Preference Shares
50,000
70,000 Investments
General Reserve
80,000
80,000 Trade Debtors
Profit & Loss A/c
50,000 1,50,000 Cash at Bank
7% Debentures
60,000
60,000
Trade Creditors
25,000
30,000
3,65,000 5,40,000
2017
₹
1,30,000
60,000
40,000
60,000
75,000
2018
₹
1,25,000
85,000
40,000
50,000
2,40,000
3,65,000
5,40,000
Calculate the value of Goodwill on the basis of the following additional information :
(a) Last five years’ profits are given below which are arrived at before changing interest on Debenture, payment
of Preference Dividend after changing depreciation and payment of tax. No dividend on Equity Shares was paid
in those years.
2014—₹ 1,00,000, 2015—₹ 1,20,000; 2016—1,10,000; 2017—₹ 10,000; 2018—₹ 1,05,000.
(b) Under Voluntary Retirement Scheme the Company spent ₹ 95,000 in 2017.
(c) Before 1st January 2017, the company had no investments. On that date it invested ₹ 40,000 in 10%
government Bonds at face value. Profits of 2017 and 2018 include interest on Govt. Bonds.
(d) The reasonable return on capital employed is 12%:
(e) The goodwill is to be valued on 3 years’ purchase of super profit.
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Q. 4:
The Balance Sheet of Star Co. Ltd. is as below:
30,000 Equity Share of ₹ 10
Capital Reserve
Sundry Creditors
Provision for Taxation
Profit & Loss Account
Add: Profit for this yr.
₹
3,00,000
20,000
71,000
55,000
11,000
55,000
Goodwill at Cost
Land & Buildings
Plant & Machinery
Stock at Cost
Book Debts
66,000 Less P.D. Debt.
Cash at Bank
5,12,000
₹
30,000
1,75,000
90,000
1,15,000
9,8,000
3,000
95,000
7,000
5,12,000
You are asked to value the goodwill of the company on the basis of 5 years purchase of super profits, for which
purpose the following information are supplied :
(i) The rate of income-tax is 50%.
(ii) The reasonable return on capital is 12%.
Q. 5:
From the following information, calculate the value of goodwill as on 31.03.2019.
Equity Share Capital (₹ 10) ₹ 5,00,000.
10% Pref. Shares Capital ₹ 2,00,000.
Reserve & Surplus ₹ 70,000.
9% Debenture ₹ 1,00,000.
Depreciation fund ₹ 60,000.
Creditors ₹ 50,000.
Assets side of Balance Sheet includes preliminary expenses ₹ 20,000.
Market Value of Assets is ₹ 70,000 more than the book value.
Profits for last three years after 40% tax were ₹ 75,000, ₹ 84,000 and ₹ 1,14,000 respectively.
Fair Return on Capital Employed in this type of business is estimated at 10%.
You are required to calculate —
The value of goodwill by capitalization of Super Profit. (Take Weighted Average Profit)
Q. 6:
Following information relate to a company as on 31.03.19 :
Equity Share Capital 40,000 shares of ₹ 10 each, fully paid and 25,000 shares of ₹ 10 each, ₹ 4 paid.
 9%, Pref. Shares Capital ₹ 3,00,000
 Reserve and Surplus ₹ 90,000
 12% Debentures ₹ 2,50,000
 Assets include a non-trade investment, the market value of which is ₹ 1,20,000 (Book value being
₹ 1,40,000)
 Before tax profits for last three years were ₹ 95,000, ₹ 1,25,000 and ₹ 1,40,000 respectively (including
income from non-trade investment of ₹ 10,000 on an average).
 Rate of income tax is 30%.
 Fair Return on Capital Employed in this type of business is estimated at 9%.
You are required to calculate —
(a) the value of goodwill using 3 years’ purchase of Super Profit Method, and
(b) the value of each fully paid equity share taking the value of goodwill as computed in ‘a’
(Take simple average profit)
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Q.7.
From the following particulars of a company ascertain the value of goodwill under the following methods :
(i) 3 years purchase of super profit and
(ii) Capitalization method.
(iii) Annuity of super profit method when Present value of an annuity of ₹ 1.00 for 3 years at 10% interest
is 2.49.
Particulars :
(a) Average Capital Employed in the business is ₹ 14,00,000
(b) Net Trading Profit of the firm for past 3 years : ₹ 2,15,200; ₹ 1,81,400 and ₹ 2,25,000
(c) Market rate of interest on investment @ 8%
(d) Rate of risk return on capital invested in business is @ 2%.
(e) The profit included non-recurring profits on average basis of ₹ 2,000 out of which it was considered that even
non-recurring profits had a tendency to be recurring at an average rate of ₹ 1,200 per year.
(f) Sundry assets of the company ₹ 15,00,000 and current liabilities - ₹ 60,000. Ignore taxation.
Q.8.
From the information given below calculate the value of Goodwill by Capitalisation of Average Operating Profit:
Capital and liabilities of the company (as per its Balance Sheet as on 31-03-2019) includes the following :
Shareholder’s Fund
₹ 2,50,000
7% Debentures
₹ 4,50,000
Profit after charging 40% income tax for the last three years were :
2016-17: ₹ 1,56,000; 2017-18 : ₹ 1,84,000 and 2018-19 : ₹1,76,000.
It was found that, in 2016-17 the company purchased a machine it ₹ 50,000 and charged the same against its
profit. The company charges depreciation @ 20% on WDV of such machinery. Debenture were issued prior to
2016-17.
Similar companies earn after tax operating profit @ 8%. [Consider simple average profit]
Q.9.
From the following information calculate the value of goodwill as on 31.03.19
Equity Share Capital (₹10) ₹ 4,00,000.
10% Pref. Shares Capital ₹ 1,00,000.
Reserve & Surplus ₹ 90,000.
9% Debentures ₹ 1,00,000
Depreciation fund ₹ 60,000.
Creditors ₹ 70,000.
Market Value of Assets is ₹ 90,000 more than the book value and non-trade investment included in assets
₹ 1,30,000.
Profit for last three years after 40% tax were :
2016-17 : ₹ 84,000, 2017-18 : ₹ 1,08,000 and 2018-19 : ₹ 1,05,000 respectively.
Non-trade income of ₹ 14,400 (before tax) is included in the amount of profit for 2017-18 only.
Fair Return on Capital Employed in this type of business is estimated at 12%.
Goodwill is to be valued on the basis of 4 years purchases of Super Profit.
(Take simple average profit)
Q.10.
From the following information, compute the value of Goodwill as per ‘Capitalisation of Average Profits’ method.
(i) Capital employed = ₹ 15,00,000
(ii) Normal rate of profit = 10%
(iii) Net profit before (Tax rate @ 30%)
Year ended
2018
2017
2016
2015
2014
Profit (₹)
2,75,000
3,00,000
2,60,000
2,80,000
2,20,000
(iv) Non-trading Income ₹ 10,000 and Debenture interest ₹ 20,000 on an average included the Profit & Loss
statement.
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