Valuation of Goodwill
Valuation of Goodwill
Valuation of Goodwill
GOODWILL
SUBMITTED TO
DR.SANJAY KUMAR RAJAK
SUBMITTED BY
SUBHA K.S
M.COM IST SEM
THE PROBLEM
• The monetary value of reputation of the
What is known as Goodwill?
business is known as Goodwill.
Why should this problem be • Goodwill has the extra earning capacity
solved? i.e.higher profit
How will I know goodwill can • It exists only when the firm earns super
be converted in to cash? profit.
CIRCUMSTANCES FOR VALUATION
OF GOODWILL
• In the case of company
At the time of amalgamation and absorption,on the sale of a company
etc.
• In the case of partnership firm
On the admission of a partner,on the death and retirement of a
partner,on the sale of partnership business,on alteration of share of
profit of the partner,on sale of business etc.
METHODES OF VALUATION OF GOODWILL
Simple Weighted
Average Average Profit Super profit
average profit Method method
Profit Method method
AVERAGE PROFIT METHOD
• Calculate the amount of goodwill at four years
purchase of the last five years’ average profit
No. of years purchase means the no. of years which the firm likely to earn same amount of profit.
CALCULATION OF NORMAL PROFIT
Net Profit during the year xxxx
Add Abnormal Losses xxxx
Less Abnormal Gains xxxx
Less Normal Expenses xxxx
Add Normal Gains xxxx
Total Normal Profit/Maintainable Profit xxxx
Steps of Calculation:
• Calculate the actual /average profit.
• Calculate the Normal Profit.
Normal Profit=
• Super Profit=Actual Profit-Normal Profit
• Goodwill=Super Profit No. of Years Purchase
=
CAPITAL EMPLOYED(NET
ASSETS)
Capital Employed at the beginning of the year 1 Of Revenue profits of the year
2
CALCULATION OF AVERAGE
CAPITAL EMPLOYED
Assets Liabilites
Plant and Machinery-2,50000 9%Debentures-200000
Land &Building-1,50000 Trade Payables-60000
Current Assets-260000
Profit(2013-14)-80000
𝑆𝑢𝑝𝑒𝑟 𝑃𝑟𝑜𝑓𝑖𝑡
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑛𝑛𝑢𝑖𝑡𝑦
4.If present value >1 Goodwill=Super Profit Present value of Annuity
THANK YOU