Valuation of goodwill

Valuation of Goodwill

1. Mr Amar has been doing business, intends to sell his business on 1-12-2006. 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:

2003-Rs.2,00,000; 2004—Rs. 2,40,000 ; 2005-Rs.3,00,000 and 2006- 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 2006 include income from investment of Rs.20,000. The profits of 2003 were reduced by RS.60,000being loss on speculation. Similarly, in 2005 profits were reduced by Rs.1,00,000 due to loss from betting.

2. Ramesh purchased business from Suresh from 1-4-2001.Profit earned by Suresh from the preceding years were :

1999-5,00,000 ; 2000-6,00,000 ; 2001-5,40,000

 It was found that the profits for the year 1999 included a non-recurring income of Rs. 20,000and profits for the year 2001 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 a premium of Rs.5,000 p.a . Ramesh at the time of purchase of business was employee as manager of an identical business concern at a monthly salary of Rs. 10,000.He intends to replace the manager of business who is drawing a salary of Rs.7,500 p.m . The goodwill is estimated at 2 years of purchase of average profits. Calculate Goodwill.

1. Profits of 2000 is reduced by rs. 5,000 due to stock destroyed by fire and profits of 1999 included a nonrecurring income of Rs. 3,000

2. Profits of 2001 include Rs. 2,000 income on investment

3. The stock is not insured and it is thought prudent to insure the stock in future. The insurance premium is estimated at Rs 500 p.a

4. 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.

On a scrutiny of the accounts the following matters are revealed:

1. On 1st January ,2000 a major repair was made in respect of the plant incurring Rs. 30,000 which amount was charged to revenue. The said sum is agreed to be capitalized for goodwill calculation subject to adjustment of depreciation of 10% p.a on reducing balance method.

2. The closing stock for the year 1999 was over valued by Rs.12,000

3. To cover management cost an annual charge of Rs.24,000 should be made for the purpose of goodwill valuation. Compute the value of goodwill.

1. The company purchased new furniture on 30th September 2003 which was entered in purchase day book. The value of furniture was Rs.10,000 . For the purpose of goodwill the error has to be rectified and depreciation should be provided at 10% under written down value method.

2. The opening stock of year 2003 was undervalued by Rs.2,500

3. Anticipated additional expenses in administration is Rs.5,000

8. A company is selling its business to another company, has earned an average past profit of Rs. 1,60,000 p.a and the same amount of profit is likely to be earned in future also, except that:

1. Director’s fee of Rs. 12,000 p.a charged against such profits will not be payable by the purchasing company whose existing Board can manage the new business also.

2. Rent of Rs. 28,000 p.a 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

3. The net assets, other than goodwill, were Rs. 18,00,000 and it was considered that a reasonable return on investment in this type of business would be 10%.

Calculate the Goodwill of the company under the Capitalization of the average profits method.

9. From the following particulars, compute the value of Goodwill on the basis of 3 years purchase of super profits taking advantage of last 4 years.

Fixed assets-Rs.8,00,000   Current assets- Rs.80,000 Current liabilities- Rs.1,60,000  Normal rate of return-15%  Managerial remuneration if employed elsewhere-Rs.10,000 p.a

  Profits for the last 4 years were Rs. 1,20,000 , Rs. 1,40,000,  Rs. 1,30,000 and Rs.   1,50,000 respectively.

10. Mr. Ram invested a sum of Rs.3,00,000 in his own business which is a very profitable one. The annual profit earned from his business is Rs.60,000 which included a sum of Rs.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 Rs. 7,200 p.a in alternative employment. Considering 2% as fair compensation for the risk involved in the business. Calculate the value of goodwill of his business on capitalization of super profits at a normal rate of return of 12%.

11. The net profit of a business after providing for taxation for the past 5 years are: Rs. 80,000  Rs.92,000 ,Rs.85,000 , Rs. 1,05,000, and Rs. 1,18,000. The capital employed in the business is Rs. 800,000. 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 ;

1. 5 years purchase of super –profit method

2. Capitalization of super –profit method

 The following net profits were earned which included a fixed income from investments of Rs.4,000 p.a

1999-Rs.64,000,        2000-Rs.72,000,           2001- Rs.86,000,       2002- Rs.90,000

Standard rate of return on capital employed in such type of business is 8% . Compute the amount of goodwill of the above business at 3 years purchase of weighted average super profits for 4 years assuming that each year’s profit was immediately withdrawn in full by the proprietor.

14. The net profit of a company after providing for taxation, for the past 5 years are: Rs.40,000,  Rs.42,000,  Rs.45,000,  Rs.46,000 and Rs.47,000. The capital employed in the business is Rs.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 5 years . Calculate the value of goodwill of the business on the basis of ;

1. Annuity of super profits, taking the present value of annuity of one rupee for 5 years at 10%interest is Rs.3.78

2. Capitalization of super profit method.

3. 5 years purchase of super profit method.

15. The net profit of a business, after providing for taxation, for the past 5 years are: Rs. 80,000,  Rs. 85,000,   Rs.92,000,  Rs. 1,05,000,   and Rs. 1,18,000. The capital employed in the business is Rs.800,000. 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 :

1. 5 year’s purchase of super profit method

2. Annuity method, taking the present value of annuity of Re.1 for 5 years at 10% as 3.78 and

3. Capitalization of super profit method.