Skip to main content

What is Goodwill? What are the valuation methods of Goodwill?


Goodwill: It is an intangible asset . If a company pays more than the book value to purchase the company it is due to that goodwill of the company. The company earns goodwill by satisfying the needs of a customer, solving  customer grievances in fixed time, and provide services and product in reasonable prices etc. but all of this not happen in few time. Company earn super profit which means it earns more than normal profit due to its goodwill in a market. Newly established company does not earn goodwill because people don’t know about the company and they can’t trust in new company so easily in comparison to old and well established company who work in a market more years in comparison to new one. With the help of goodwill company gets well known in a market, easily gets the client for the company, profit earns more than normal, easily compete with the competitors.
So, it is necessary to ascertain the value of a company’s goodwill. If there is any acquisition, partnership and mergers are taken place in future.
Valuation of goodwill:
There are three types of goodwill valuation methods:
·         Average profit method
·         Super profit method
·         Capitalisation method

1.       Average profit method: It is divided into two parts:
·         Simple average profit: In this method the goodwill calculated with the help of average of past year profit of a company before calculated the average profit of the company first adjust the profit by adding the normal losses and abnormal gain and subtracting the normal losses and abnormal gain. And after that multiply average profit with number of years purchase.
Simple average profit method = adjusted profit / number of years
Goodwill = Average profit* number of years purchases
·         Weighted average method: under this method the profit of an each year multiplied with their assigned weights and then sum the product and after divide with total number of weights. And then the result is multiply with number of years purchases.
Weight average = Total of product of profit with weights / Total of weights
Goodwill = Weighted average of profit*Number of years purchase
2.       Super profit method: It is divided into 2 parts:
·         In this method super profit is calculated which indicate more than normal profit. First of all calculate normal profit and then subtract it from average profit to ascertain the super profit. To calculate the goodwill multiplies super profit with normal rate of return.
Super profit = Average profit – Normal profit
Normal profit = Capital employed * Normal rate of return
Capital employed = total assets-fictitious assets-outside liability
·         Purchase method: Under this method super profit is multiply with number of years purchase.
Goodwill = Super profit*Number of years purchase
·         Annuity method: Under this method super profit is multiply with present value of annuity.
Goodwill = Super profit*present value of annuity
3.       Capitalisation method: It is also divided into two parts:
·         Average profit method: To calculate the goodwill in capitalisation method first of all find out the average profit then divided by normal rate of return to get average capitalized value of business and after that subtract the result from the actual capital employed
Average capitalized value = {Average profit / Normal rate of return} *100
Goodwill = Average capitalized value of asset – Net asset or actual capital employed
·         Super profit method: Under this method super profit is divided with the normal rate of return.
Goodwill = Super profit * (100/Normal rate of return)

Comments

Post a Comment

Popular posts from this blog

How to calculate Cost of Preference Share Capital?

Cost of Preference Share Capital:  An amount paid by company as dividend to preference shareholder is known as Cost of Preference Share Capital. Preference share is a small unit of a company’s capital which bears fixed rate of dividend and holder of it gets dividend when company earn profit. Dividend payable is not a tax deductible amount. So, there is no tax adjustments required for comparing with cost of debt. Formula for Cost of Preference Share: Irredeemable Preference Share Redeemable Preference Share K p  = Dp/NP K p  = D p +((RV-NP)/n )/ (RV+NP)/2 Where, K p  = Cost of Preference Share D p  = Dividend on preference share NP = Net proceeds from issue of preference share (Issue price – Flotation cost) RV = Redemption Value N = Period of preference share Example:  A company issues 20,000 irredeemable preference share at 8% whose face value is Rs.50 each at 4% discount. Find out the Cost of Preference Share Capital.
88 comments
Read more

What is the difference between Cheque book and Pass book?

 Cheque book is issued by bank in customers / account holder request. With the help of this book account holder can withdraw cash from his/her account. Bank does not charge any fee to issued cheque book to its customer. But afterward bank charges some amount for using bank facility like cheque book, Debit card etc.So, Automatic some definite amount deducted from customer bank account. Pass book is  also issued by bank to its customer. It helps to record all the bank related activity according to date that is withdrawal and deposit. It is recorded by bank but the book is kept by customer to know the current balance of  his /her account.  Point of difference Pass book Cheque book What is the meaning of pass book and cheque book? Passbook is a book in which all withdrawal and deposit against customer account is recorded.   Cheque book is a book of cheques which are used to withdrawal the money to bank account.
Post a Comment
Read more

How to calculate interest on Hire Purchase System?

Interest on hire purchase:  Interest is calculated on Cash value of goods not in instalment value which includes cash value of goods and interest amount. It is calculated on yearly, quarterly and yearly basis. Interest is not calculated on down payment which is paid at delivery of goods. Depreciation is also charged on the hire purchase goods at the end of financial year. The method applies for depreciation is based on the contract between the parties.   Example:  Company V purchased a machine of Rs.70, 000 and paid Rs.5, 000 as down payment. The interest charged @6% and 8% depreciation annually. The instalment value for each year is Rs. 10,000. Find out the interest amount for 5 years. Solution: Interest calculated on Rs. Interest Instalment Cash Value 65, 000 65, 000*0.06 = 3, 900 12, 500 8, 600 56, 400 56, 400*0.06 = 3, 384 12, 500 9, 116 47, 284 47, 284*0.06 = 2, 837 12, 500 9, 6
3 comments
Read more