Valuation of Goodwill by Super profit method:
Goodwill = super profit*number of years purchase
Super profit = Average profit – Normal profit
Normal profit = Capital employed* Normal rate of return
Example: Find out the goodwill of a company with the help of given information:
|
Number of
years purchase |
3 |
|
Capital
employed |
Rs. 2,60,000 |
|
Normal rate
of return |
10% |
|
Profit/Loss: |
|
|
2008 |
80,650 |
|
2009 |
78,000 |
|
2010 |
42,500 |
|
2011 |
90,000 |
|
2012 |
1,20,000 |
Solution:
Normal profit = (2, 60,000*10/100)
= Rs. 26,000
Average profit = (80,650 + 78,000 + 42,500 + 90,000 + 1, 20,000) / 5
= (4, 11,150/5)
= Rs. 82,230
Super profit = Rs. (82,230 – 26,000)
= Rs. 56,230
Goodwill = 56,230*3
= Rs. 1, 68,690
Example: Find out the goodwill of the ABC Company if the number of year purchases is 2. The profit of 2013 is Rs. 95,000, 2014 – Rs. 170,000, 2015- Rs. 80,000, 2016 – Rs.1, 65,000. There are some adjustments related to profit which are as follows:
The closing stocks of 2013 are overvalued of Rs. 35,000 and there was a loss in 2013 of Rs. 5,000 by fire which was included in profit. The total assets of company are Rs. 5, 60,000 and outside liabilities are Rs. 1, 56,900. The normal rate of return is 8%. Use super profit to calculate goodwill.
Solution:
Adjusted profit:
|
Years |
Profits |
Adjustment |
Total profits |
|
2013 |
95,000 |
(35,000) |
60,000 |
|
2014 |
(20,000) |
35,000+5000 |
20,000 |
|
2015 |
80,000 |
---- |
80,000 |
|
2016 |
1,15,000 |
---- |
1,15,000 |
|
Total |
|
|
2,75,000 |
Average profit = (60,000+20,000+80,000+1, 15,000)/4
= Rs. 68,750
Capital employed = Total assets – Outside liabilities
= Rs. (5, 60,000 – 1, 56,900)
= Rs. 4, 03,100
Normal profit = 4, 03,100 * 8/100
= Rs. 32,248
Super profit = Rs. (68,750 – 32,248)
= Rs. 36,502
Goodwill = super profit* number of years purchase
= 36,502*2
= Rs. 73,004
Example: A partnership firms in which 3 partners share the profit in 3:2:4 ratios according the capital invested by each partners. The remunerations of all partners are Rs. 1, 20,000 per annum. The profit of the firm is as follows of 5 years:
|
Years |
Profit |
|
2001 |
1,60,000 |
|
2002 |
1,50,000 |
|
2003 |
(30,000) |
|
2004 |
1,86,000 |
|
2005 |
1,58,000 |
The profits mentioned above included some abnormal profit and losses: In 2002 Rs. 10,000 included as abnormal profit, 2003 Rs. 80, 000 is included as abnormal loss, 2005 Rs. 15,000 not paid as insurance premium.
The capital employed of a company is Rs. 4, 30,000. The normal rate of return is 7%. Find out the adjusted profit and goodwill of the company with the help of super profit method.
Solution: Adjusted profit:
|
Years |
Profit |
Adjusted profit |
Total profits |
|
2001 |
1,60,000 |
---- |
1,60,000 |
|
2002 |
1,50,000 |
(10,000) |
1,40,000 |
|
2003 |
(30,000) |
80,000 |
50,000 |
|
2004 |
1,86,000 |
---- |
1,86,000 |
|
2005 |
1,58,000 |
(15,000) |
1,43,000 |
|
Total |
|
|
6, 79,000 |
Average profit: 6, 79,000/5
= Rs. 1, 35,800
Average profit after deducting remunerations of partners = Rs. (135,800-1, 00,000)
= Rs. 35,800
Normal profit = 4, 30,000*7/100
= Rs. 30,100
Super profit = Average profit-normal profit
= Rs. (35,800 – 30,100)
=Rs. 5,700
Goodwill = super profit* number of year purchases
= 5,700*3
=Rs. 17,100
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