Unit -3

Oate 15/1/

Valuathon of Ghoo dwill

oholussta
Methods of Valuation of Goodwi) : 2s2201
Average Profits Method : a- Simple avg. method
I Super Profrts Method b Werghted avg. methodo
i : Capitalisa tion Method:
a Capitalisate OF auerage profits
23 HAlD2 tnos t) bs Caprtalisathon of Super profits -251
V Annuity Method toropagsb

92129m031 Iootdo -229

formats: tasvstn

G Average Drofits Method

Step-l Calc. of adjusted profits
Particulars Rs. (7)
Profits XX
Add: Abhormal |DSSes XX
Less : NoYmal erpenses (Xx)
Add: Novmal incomes XX
Less: Abnormal ncomes (xx)
Adjustedprofits = XXX
Total adjusted profits FXXX
Step -2 Cale. of adjusted avg. profit (Simple avg. method)
Adjusted avg. profit = Total adjusted profit
No. of years
Step-3 Cale. of Gioodwil! lk)
Goodwill adjusted avg. profit x no. of years of purechase
Step-2 Cale. of
X
adjusted aug. profit (weghted aug. metod)
Years Profits Weig hts Dro ducts Adjusted ag. prt =
XX Given in XXX Tötal gro ducts
2 XX queston / XXX
Total Weig hts
3 XX 1, 2,3... XXX
XX XXX
XX XXX
e
 Capitali sation Method 02
Note: 3 Captalisation of Average proftsbofaibhto
expenses & losses ke Speculatten, betti ng, Step-l boths Cale. ofAdiusted Average Profit
Add - hon -recurring 2barltsvM Refer Step-D afd Step-of Average Profrts Method
fire, theft]Abrormal losses.wboo
bodtoM ohhoy SDYSA
bordsntpD bota (or Step-2 Calc. of Total Value of Business
Add hormal Incomes fke profits
bodtsM Total Value of Business = Adjusted Average Profit
SuID) o b b t p Normal Yate of return (qiven Ib Qn)
Less - homa expehses like insurane premium (retum) rent, salaries.
bontsM Step-3 Cale. of
depreciation. Gioodwill= Total Value of Business - Caprtal EmployedW2
Les- abnormal Incomes ike latteri es, qambling, returns On inuestments, [Capital employed = Assets Liabltes J
2lomto
interest. oboor
borllstM
Drofits Method
batawibn Super
Step Cale. of Adjusted Average Drofitbatts
XX atitoy eoRefer (StepD and Step-) of Average Drofits Method t2
YOndA bbA
IoayoM229 Step-2 Calc. of Avevage CapitalEmployed
Market value of Assetsoo
omvaohA Average Ca pital Employed =( Liabilities
25ters omyortcA 229]
notes (-) half profts of qiven year Cgiven in Gn)
Intol Refer Theory paper
bst2Mibs C-qste (Note: - when captal employed is qiven Ih the problem, ho need
Istol bstav bA to use step-2 here)
Step-3 Calc. of Nomal profrt
-497G Normal profit = Auerage capital ermploye d x horma) vate of veturn (ghuen
Step Calc. of Super profit
Super profit = Adiustd Average Profit - Nomal proft

Step-5 Cale. of Ghoodwill

Ghoo dwi l! Super profrt x ho. of years of purehase
 Avg. profits method
bothsh
Problems : -
B Capitalisa then of Super profts Profit
Step-l Calc. of Adjusted Average Metthod
Refer (Step-D &(Step-2) of Avernge Profts Step-1
Particulars
oCale. of adjusted profits
2012-13 2013-Iu 20y 15
Step -2 Cale. of Aveag e Capital fmployeo of
(a00,oS) 20|1-12
360,0004
Step- of Super profts Method Given ih ques tion (nest Proits ot 200, 000O 240, 000 300, 000
Refer the time) Les: Salary/Remuneration
(6000 x (2 months) (72, 00) (72,000) C72,000) (72, 000)
Step-3 Cale. of Normal
profrt (20,000)
0 Normral profit = Average Caprtal enplouyed xnomal rate of
retum (given) Less: Tntome on nvestnent
Add: Los on speculation 0,H 60000
l00, 000 Icto
Step-4 (ale. of Super profito Add: LosS from bething 328,000 268,000
proftba 188, 000 l68, 000
Super profit = Adjusted Aveage Profit - normal Adjustedprofits
beolorns Total adusted Drofits = 952,000
Step-5 Cale. Goooluill ustedotihogbtauibo s8phot
Gooduill = Super profit Step -2 Cale. of adusted aug. profite
homa rate of return (qlven in On) Adjusted aug. proft Total adjusted profits
bodtaM No. of years
() Annuty Method lgste q52,00o ohutbA
Step-1 to Step- Same as above & other methods
Adjusted aug.profit 238,000 lliuboon)
Step-5 Cale. of Gioodwill
Goodwill a Super proft x anuity vaue /rate Cgiven In n.) Step-3 Calc. of Goodwill
Goodwill = odusted avg. profit x no of years of purchase
238,000 x 3

Gyoodwill = F7I4,000

ioboor
-
 borllt -1am9loor 3- Step-1
2 Step-l Cale. of adjusted profits 201s -15
Calc. of adjusted profits
2013-|4 al-lo Pariculars SO 2011-12 2012-13 2013-14 2014-15
Parheulars 2012- 13
y6,000
600,000 5y0,000 Drofi ts uo, o00 So,000 U8,000
Pro fits bol 500, 000
v(6000)o
(20,000) Less: Remuneration to proprietor (6000) (6000) (6000)
Less: non-recuring ineome 30,000 s2/000ri uo 0 0 0 l
Add! loss due fireou
(6000)mims (S000)
Adjusted profits 3u000 Lu000
Less: nsurance premium (5000) Total adjusted profits = T\60,00o
Less: Remunerati on to manag er
[Io,000 -7500 = 2600 x 12] (30,000) (30000) (30, 000) Step -2 Cale. ofo adjusted aug. profiton
Adjusted profitso y45,000 565, 00002 535, 000 Adjusted aug prott Tota l adjustedprofits
pntttod No. ofyears liorg bstaibe
Total adjusted profits = F1,6u5,000 160,000
Step-2 Calc. of adjusted profit bstvibn
Adijusted profit = Total adjusted profits Adjustedavg. proft = yo:000t tegsbot2vb
No. of years
(645,000 batauibA Step-3 (alc. of Gioodwill
3 Gooduwil = Adjusted aug. profit x ho. of years of pure hase
Adjusted aug. profit = 515,000 Uo, 000y 3
Goodwill =7l20,000
Step -3 Cale. of Goo dwill bsl2vibA
Goodwill = Adjuste d aug. profrt x ho. of Sinceu there ftuctuaton profits each year,
515,000x 2
yeaks of purchase Note:
followed. E
Sim ple aug method has been
TI,030,O00 uboor
Ilwboor

--
 Step-! Calc. of adjusted profits 5 Step-! Cale. of
adjusted profits
Particulars 2012-3 2013 - 14 20|4-15 Particularso 2010-|| 201|-12 2012-13 2013-lu 20|u-1S
50,000 U8,000 52,000 profits Uo, 000 50,000 45,000 6o 000 80,000
Profts 5000 SI89
Add: Loss due to fre oob Less: abnorma) prott (5000)
Less: non- recumng ineome00 (3000) Add: abnormaloloSS
boimbo (2000) Less: 1nsaranee premium (5000)
Less: Ineome on investmert
(500) (500) (Soo) of building - ( 2 0 , 000)
Less: insurance premium Less: sale
(o|000) (o000) (io,000) oD)Adjusted frofts Tosa0) 35,000 60,000 60 000 60, 0003
Les: Remunerati on to propnetor te
Adusted rofts 36 500 y2,500 39,500 Total adjusted profits F255,000 bt
stol
Total adjusted protits = l|8,50
00,081 Step-2 (ale. of adjusted aug. profita
Step-2 Calc. of adjusted aug. profit Adjusted aug. profit = Tota l adjusted profit
Adjusted aug. profit = Total adjusted rofits No. of years
255,000
No. years
I18, 500
3 Iiauboor Adjusted aug. profit = 51,000
Adjusted aug. profrt = 39,500
icboor Step-3 Cale: of Goo dwil
Step-3 Cal. of Ghoo duwill Goodwill = Adjusted aug. profit x no. of years f purchase
Goodwill = Adusted aug. profit x ho. of years of purhase tato 51,000 >x 2
= 34,50G x 2
slgoma Goodwil) = FI02,000
Goo dwill = T4,09

--
 Step-l Cale. of adjustedprofits 7: Steg
uPartculars os - o t O s 2013 2014 2015y2016
Drofitsood oc0,8A 50,000 60,000 Proft
Add: capital exp" (Repair erpenditurè) o08) 12,000 Add: Puret
Less: Dep on plant &machinery o,01 (1200) (o0) Less: Dep
Less: overvaluatin of stock Add: unde
Add: undervaluahen of stock ontbl uo00-2 Less: ouerv
Less: Cost of management o0, c00,85 (q60o) (a600) (060) (a600) Less: addi
Adusted profits oo 3o, y00 33,600 56,000 9320 008
Total adjusted proft 169, 320 Tota
Working hotes - b92uibo Work
Calc. Dep^ (DVM, WDV):n ste Caprtal = 12, 000bA Calc
2015 - 12,000 x l0% - |200oo 2013
2016 - (2000- (200) x0%
0800 x |Po = |O80 20lu -
000,18 thotuo bstzvip A
Step-2 of
Calc. adjusted aug. profht
Adjusted aug. profit Total adusted profit Ste
2 0 No.of yenrs bstauibA llioo
169,320 X000ee
lboor
Adjusted avg- proft U2,3 30

Step-3 Cale. o fgoodwill Yeom

Gloodwill = Adjusted avg. profit x no. of years of pure hase 2011
42, 330 x3 2012
Ghooduwnll = I26,940 2013
20ls
Note:
If clesing stock is ouenvalued /un denualued, Subtact/Add respe hvely St
Ih the Satme year qven.
IA
If Oheni ng stbck is overvalued /undenalued, Convert it into closina
Stock of previous year & su btact ladd vespecthvely in the
previous year.
 7 Step-l Calc. of adjusted profits o
ParticulastoL 1O 201-12 2012-13 2013-l4 75,000
2010 -15
Drofits U6,500 60,000
00,001 Uo,600
A: Durchase of hew furnrture (captal erp") (fhoig -o YI 0,000
Less: Dep (o008) (S0o) (050)uo
Ad: undervaluation of stock 2500
Less: overvaluaton of Stock -otz (25 00)oimohou bA
Les: a dditinal exp (Co0 6) (000) (50o) (5000)(5000) o
o0d Adjusted profts 35, 500u00 62,000 69,050
Total adjuste d profis bsfeuibo
Working notes -ton
Calc. of Dep (DUM, wDv) : (VGVCosta l0,000 o o)
2013 - I0, 000 x |0%x 6
12 aPo) x (o00 E- 000,08)ViOC
20lu - (0,000 - 5o0) x lo%
4500 x (0% = 950

Step-2 Calc. off adjusted aug. proftrl

tip Adjusted aug. profit Total adjusted proits
No. of years
210,550

8
Year Profts X WeightsProduct ia Adjusted aug. prfit = Total product
20||-12 35, 500 to ote 35,500oY u botbA l otal weight
2012-13 2.5 E1eol671,||0
2013-|4 62,000 3.8 235,600 OSE TRE|.50co
20ls-15 69, 050 4.2 290,0|0 = 58,357

Step-3 Calc. of Gioodwill

Grooduill = adiusted aug. prt x ro. of yers of purehas e
58, 357x3
Gioodil = FI75,07L
 pofit o Step-! Calc. of adjustedbi profit
8 Step-l Calc. of i adjusted 20||-12 2012-13 2013-1u 201s -15
Particulars 20||-12 2012-13 2013-4 201u-15
Particulas 124,000 |00,000 |60,000
/ol,000 Profits 81,000 q5,000 |20,000 I50, 000
Profits co,08 T - e o a v t 80, 000 20,000
Add: Cqptal exp" (repir of plan (3000) (2700)
Ad Capital erp (re pair of mahinery)hon (1000) (iq00)
Less: Dep Less: Dep
Les: Dvevva luation stock (2000) 1es: Overvaluatan of Stor k (5000)
-Nc3 (2,000otioiuo Add: underualuation of Stock 5000
Aod: undervaluatin of Stock
Cy,000)
(o00) (24, 00) (yo0) (2u 000) less MManagement Cost 29r (10,000) (0,c00) (0,c)
les: Maagemet Cost I1S, 000 |23, 300 13u,000 18,/00
Coy2 Adsted profits 77, 000 86,000 Adjusted orofrtsavib 7,000 80,000
Total adjusted profits = Tu03,300oalesg bstevibD Total adjustedprofits = TU23,100
Working notes asrhort Working notes -
Calc. of Dep (DvM, WDV) Cale. of Dep (DVM, WDV):
2013 - 30, 000 x l0% = 30DO 2013 20,000 >X [0% x 6 I0O0
20/s (30,000-3000) X (o% 12
27, 000 x 0% = 2700 201s (20,000 -1000) X [0%
Gos 19,0 00x |0/o = 190o
Step-2 Cale. of adjusted aug. profit
Year Profits weights Product Adjusted ay. proft- Total product Step-2 Cale of aajusted aug profit
20l-12 77,000 77,000 Total weight Year Pro fits weight Drodet Ajusted aug. prafit = Total procuet
2012-13 &8,000 2 (7%,000 = 1,091, 200 2011 -12 7000 71 000 o000 Total weight
2013-14 (15,000 345,000 2012-13 2 |60,000
20ls-45 J23,300 L u3,200 (3u)000
= |09, 120 2013 -ly
201s -15 |3e,J00 552, UO0 = I18,5y0
o Step-3 Cale. ofGoodwil! tbos atov
Giooduill= Adjusted aug. profitxho. of years of purc Gioo dwi ll
=|04,[20 x 3 haseS-o Step-3.Gioo duillCalc.= of
Adjusted avg. profit x ho. of years of purchase
Goodwll=7327,360 8-E 000,43 = 18,5yoX 3
el-yiot Goo duill = T355,620

IboorD
 Capitalisatan of Qug.adjusted
profit aug. profit bath
lo Step -| Cale. of Step-l of adjusted aug. profrt
Cale.
Adjusted aug. profte Tetal adjusted proft Adjusted Cony) profits 160,000
No. years 220, 000 Add : Abnomaexp! oo
U7.000+ Uo, 000+ U8,000= (04Director's feeco (ooo 12,000
= O000+ 45, 000+ 5
5 28,000
Adjusted avg. proft = yu, 000 Adjustud ag. profits 200, 000

Step-2 Cale. of Total vqlue of business Step -2 Cale. of To tal value of busihess
Total value of business = adjusted qvg. profit btub Total value of business = adjusted avg. profit
hormal ate of return homal ate of eturn boajbA
uu, 000 2ston 200,000 200,000 |00

Total value of business = 2000,000 bec

uu, 000
Step-3 Calc. of Gioodoill
Total value of business uLo, 000 en Gioodwill = To tal value ofbusiness capital employeds
E 2,00o, 000- ,800,000
Step-3 Cale. qooqwillu0
Giocduill Total walue of business- capital emplayed
yuo,000 - y00, O00
Step

2-0s12

---
 Super pro fits method
Step-J Cale. of adjusted aug. prefit
20 3
Iu Ste
Porticulars (4o,000 (30,000 I50, 000 Profi
Profts |20, 000
(lopoo) (lo,000) CIo,coo) Less: Rer
Less: Remuneraton (20,000 t4o,000
Oodl0,000 (30,000
Adjusted profts
Total adusted profit Tof
Adjusted avg. profits
No. of years Ac
s=500, 000slou

Adjusted avg profts |25,000

600,c0S Ac
Step-2. Cale. of ag. Cajtal employe d
Fired assets0(20 800, 000 Ste
Add: (uret asset 80,000
880, 000o
Less: (urrent liabilities (16o, 000) Ste
720, 00o00000,
Less: half profits of last year (70, 000) [luo,000 2ubor
Aug. capital employed= 650, 000
Step-3 Cale. proft
of hormal St
Normal profit = qvg. capital employed x normal rate of return
650,000x 15%
Normal profit 97,500

Step-y Cale. of Super profit

Super profit= adjusted ag. profit - hormal profit
|25,000- Q7,S00
Super profit = 27,500
Step-5 (ale. of Goodewll
Goodwill = Super vofit xx o. of years of
27, 500 x3
pure hase
Grooduill T82,500
 Step-! Calc. of adjusted aug. profit
particulars
Drofits (07,600 qo;700 I12,500
es: Remuneration (2,00) (2,000) (2,000)da
Adjusted protits 95,60076,700 (00, 500
Total adjusted pofits = F274, 800
Adjusted aug.
aug. profit = Total adusted profits
90NO. of years
27u,800
o03
Adjusted avg. proft = q1, 600

Step-2 Calc. of enployed

avg. capital
Go0, 000 (agiven)
Capital embloyed = 600,
hg. Capital
(oo,05)ansby2
Step-3 Cale. of homal Drofit
Normal proft aug. capitalemployedx normal rate of retum
600, 000x 12%
Normal profito 72, 000 (on,ou)
boyolgnono0A
Step-y (ale. of Super profit
Super protit ad/usted profit nomal profitt

Super profit 19,600

Step-5cl Cale. of oo duill

Gioowill Super profit X to. of years of purt hase2
a,600 x3oeubostav
Goo oui l F58, 80 o00,000,08

Iliboo)
 122,009 Googuil=
6l,000x
Super2 z
hase purt ofyears chuil Gro
of ho.
profiXt
Gooduwill of Cale. Step-5
6l,000 proit= Super
Q,80,000-
profit hormal profit 000aug. adjusted proft= Super
prohit super ofCale. Step-4y
0 0 1q, profit
=prot Normal
|0% 000x 140,
return ofrate hormal empleyedx ca1tal avg =
proft Nornal
profttaubo hormal ofCalc. Step-3
000 I90,
employed capital Avg.
(uo,oo0)coo-[80,000
2] year last
of
Drofts half Less:
UDo O00 230, xbr nod ty
o tors Credl
(70,p00) lans Secured (9
baolame -00,008 liabilihes: Curent Les:
00
3polthDp
000 3o
t 60,000 Cash
bstavibA Stock
0 0 50, Debtors
assets: (urrent Add:
000 I90,
bstaxtbA Machineryaibe
0081o,000ov Buildings
Ista assets: Fixed 001 002
loyed emp capital aug. of Calc. Step-2
in
(given 000 8o, profit aug. Adjusted
8/5)olotyog
|6'
in adjusted of Cale. p-l Ste
bprofit |5
0972
l6 Step-l Cale. of adjusted augproftslsy
Year rofits X
weights Product Adjusted a proit Tothl product
785,000 785, 000 Total weight
2 845,000 I,690,000 8466000)2291
3 860,000 2,550,000
860, 000 3,4 40,000 ro 8u6,50O
po itb dou Total Prdit= 8, u65,000less: abhar nalineome on investment
(500,00Ox 8%)

Adjusted au prett = 806,500

Step-2 Cale. of avg. capital employed
fixedassetslrg 2, 000,o O o r h
Add: (urrent assets2,500,000
U, 500, 000
Less: Liabilithes
(reditors (1260,000) s
3, 250, 000tiog 9e
Less: hale prohits of lastyar
[860,000 - yo,000(income on instre)
: 820,000 2 | (ul0, 000)
Avg. capital employed 2,8u0, 000or
Step-3(ale. of nomal profit -litonocD
Normal rofit = QUg. capital empleyed x normalate of return
2,&U0, 000 x 20%
Nar mal prohit 568, 000
Step-4 (ale. of Super profit
it : adusted avg. profit - nomal rot
Super profit
806,500- 568, O00
Super proft = 23¬,500
Step-5 Cale. Goodwill
Goodwill= Super prafit xX no. of years of pure hase
236,500X3
Gooduill = T715,500
 Capitalisation Super pro fits
I7 Step-! adjusted avg.
Calk. of profit |8
bog ParticularsbbA
pProtts 60,000r
Less: Compensa hon C1o ,000) Le
Less: salary/ramunerahan (7200)2 Le
Adjusted prott s2, &o00&
t Adusted aug. Go0 (Sinre only one year's data isgve)
profit = 72,g00
profit
Step-2 (ale. of captal empbyed
aug.
ug. canital employed: B00,0 000 Cqver
Step-3 alc. of ngrmal profitepO UD
Normal profit = avg. capitzl employed x nomalrate of retum
300, 000 x 2% boA
Normal proft = 36, GOO
itilids
Step-y Cale. Super prot outibsr)
Super profit = adjusted avg. profit horma! profit
U2,00 36,000
Super profit 6800

Step-5 Calc. of
Goodoill = Super prott
st normgl rate of
6800
retunsitoCUS =oot so
6800
12 12

toovt 2
Goo dwnll = 56, 667bwb gN2

92hoon
 Step-l Calc. of
adjustedIQvg : profit
brott
Parti(ularsonoh oo,th N
Profits |20,000
Less: Compensa tiem (20,000)u
Les salary/remuneratim (4, yoo)
Adjusted prohit 85, 600oD i oboviba
Adjusted aug. profit = F85,600 (Since only one year's data is quen)
Step-2 Calc. of
Qvg. capta employedclgn
AJg. capital employed = 6o0,000 (given)
Step-3 (alc. s of hormgl
profitstioo
Normal Droft = aUg. (apita eplaued x normal rate of retun
= 600,000 x (2%
Nanal profit 72, 000

Step-4 (ale. ofSuper profit 0of voe

Super profit = adusted avg. profit homal profit
8S, 600- 72,000
Super proht I3,600

Stej-5 (ale. of Giooduill

Groodwill Super profito Xtrio0 YagN2
nar mal Yate of return
|3 600 13600 I00 O00 ,08iubean
|2 |2
|00 1912
Goodwill: FII3, 333b2
 Both
1Q Step-! Cale. of adjusted aug. profit 20
000+
85,000-+
8S, (05,0
(05 00+ |18,000
Adjusted avg. profit Ro, 000-+
= 80, 000+ 9),0o0+
92,000+

y80,000

Adjusted avg. proft = a6,O00S Tota

Step-2 Calc. of avg. capital emplbyed

Avg. capital employed 8o0, o00 (dven)
rsi)00,nc&
Step-3 Cale. of normal rofit
Nomal protit =avg. capita emplayed x normal ate of Yetum
In= Roo, 000 x(0% boo
Nomal proft 80,000

Strp-4 Cale. of Super proft

Super profit adjusted avg.o prott - nomal profit
Ib Q6,000- &0, 000
Super profiH
Step-5 Calc. of Good wåll
a 5 years pure hase ialbeo
Ghoo duill = Super proft Xno. of years of urchaseo
l6,000 x 5
Ghoo duwill =F80, 000 o00381

b' Captalisatlon of super profits

Gioo guil! = Super prottcbeon
normal ate of return
l6000 : l6,000
X

100 (osdill: (60, o00

 botl
20 Step-l Cale. adjusted augprofit
Parheularss 2 23c
Profts oN (22,000 98,500 |75,500
Less remunerationmob 03c(18ooo) (16j000) (18,000)
Adjusted profis lou 000 o,s00 |57,500
al Adjusted G profit = 342,000
Adjusted aug proht Totaadjusted prat
No of yeds
342,000
30f
Adjusted aug
avg. profit = |lu, 000

Step-2 Cak. avg. Caprtal employ edo leho

Avg capital employed = 870,000 (qven)

Step-3 Cale.yof harmalpro ft sio)

Normal profit = avg. capital employed x hormal ate of return
870,00o X |0 43003
Notmal 87, o0

Step-4 Calc. of super profit u

Super profht adjusted avg. profit - hormal- profit
(|4, 000- 87,000
Super profft = 27, 000

Step-5 Calc. of Giodwill

a' 3 yearspuro hase sboar)
Goodwill = Super proftt x o. of years of purehase
- 27,000 X 3
S10o durll = T&l, 000

b Captalisath on of Super profits

GOodul 0super prht 27, 000 le 27, 000 |00
normal ate of return

Gooduill e 270,009
 Annurty method
21· Step-l Calc. of adjusted avg. po fito 22
2 3 ut 5
Particulars
92,000
Profits0te1 00 8o,000 8up00
8u,000
qo000
qyi000
q2/00044, 000
(coo) Adjusted proits 80,000 Le
Year c0 ProfitsweightsProducts
8o,000 So,000 Adjusted avg profit- Total produch
2 8u,000 ov 2ot2ib l66, 000 bst:Total
(356,000
weight
qo,000 309 270,000
368, 000 15
Q2,000 S
5 qu, o00 5 47o,00 Adju sted aug. profit =Fq0, uoo

Step-2 Cale. avy. Capital employed

Avg. capital employed = 8oo, 000 Cgven)
Step-3 Calc. of normal proft
Normal profit Capital employed xnornal vate of return
Nortmal ro ft 80,000

Step-4 Cale Super proft

Super profit = adjusted aug. Dro fit hormal profit
Qo,uo0 - 0,000
Super proft
Step-5 Calc. of Gioodwill
(Greadtt) 5 years purehase
Ghooduwill = Super pro frt x ho. of
10, 490 X5 years of purchase
Grodwll ==52, boo hago2wbood
b' Annuity of Super profit
Goo dwill = Super pro ft x annuity value
|o, y00X 3.78
(noodwill= 39, 312
22 Step-1 Calc. of adjustedin avg.t profit
Particulars -iot
profts o00,081 31,000
Less: interest on investment
(20,000X 5%) (co03) (1000)
Adjucted aug. prpft =0Uc 30,000eo (Since only ore year's data
= o00,198 his given) ot
000,87
Step-2 Calc. of ag. capita employed
Fixed assets S =nesi 185,000sfzibA
(I80,Oo0+ 5000)
Add: Current assets9 Ishso (Oo, 000
CO0, 00 285,000
Less: Current liablites
Provislon for tac (lo,000)+00 ,001)
Debentures3 (50,000)
Creditors (25,000) 2idoi 4229J
(o00001 200,000 t v )
Less: half profits of last year (I5,000) (30,000-+ 2]
Avg cqptal employed 185,000o hot) 291

Step-3 Calc. of normal profit lctia0 04

Normal profit avg. cap1tal employed x nornmal rate of return
|85,G00x |0%
Nomal profit E18,50Oo9 lgosVO -thot

Step-4 Calc. of Super profit ot2

Super proht + adjusted avg. profit- normalroft
30, O00 - |8,500
Super profit Il,Sco

Step-5 Calc. geodwill

of
Groodwill =Supero profit x no. of years. ofpurchase
: l|5o0 x 5
Goodwnll = F57,500
23 Step -I Cale. of adjusted aug. proft 2013-1420)y-15 24 Ste
Pavh calars 20/2-13
l30,000 I25,000 1So, 000 Prof
Prots
Less: Interest Oh investmernt Less: Int
(100,000 x 6%) (ooo (6000) (6o00)ooa (6000) (
I19,000 l4, 000
ik Adjusted profts2u 000 Totat
Total adjusted profit = T387,000 Ad
387, 000
Adusted aUg. proit = Total adusted profts t

3
Ad
No. 0f years uo
Adjusted aug. profit = |24,0 00 Stet

Step-2 (ale. of avg. captal employed Ade

Fixed assets Yo, 000
Add: (urrent assets
(u00, 000 +20,00) 20, 000uoy Less
(20, 000d9
Less: Liabilfhes otibo Less
(urrent liabilites (100, 000)
000E 720, 000 thog
Less: half orots of ast year Ste
(uu, o00 2) (72,90o) N
Avg. capital employed = 64&,o00
Iomvo Step
Step-3 Cale. rormal profirt ooe9 Su
Normal profit = avq. captal employed x normal rate of return
= b4e,000 X|5% q7, 200 Ster
of
Step-4 Cale. Super protit yg
Super profit adusted avg- proft - homal profit Groe
= l29, 000- q7, 200-co0o:
Super proft = 31, oo 6 cap
of qood will Gd
Step-5 Calc. iobeop
Goodwill= Super profit x ho. of years of purchasebocr)
3l, &00 x y
9Anr
Gioodwi ll = FI27,200 isboor
24 Step-] Cale. of adjuste dbavg.
avg. proft slo)
Partulars aloc 2012-13 2013-14a20|4 -15
profitsy 130,000 |25, CO0 |60,000o
es: Ihterest investment tasystl 251
(190,000 X 8%)s) (o025) (8000) (eooo)Ge (G0oo)
Totat Adjusted profrts 122,000 117000bo lu2, 000
i Adiusted (a) profits = 381,000 2 7 t o t bsfauibD Istol
Adjusted avg. proft Total qa Ëusted profits = ti381, 000 = b127,00o
No. ofyears d 0 o 3
Step-2 (ale. of avg. capital employed o
ixed assets
assets o8 yoo,000sz2 0 bsxit
Add: (urrent assetsool boA
(yoo,000 +20, 000)o0,0lJ y20,000
820,000lidbi tosri) 6229J
Less: (urrent
habiihes,0a (00,000)
720,000D to zirog p 229J
Less: half profits of last year)
(tu2,000 2)
Avg. capital enplayed =6u91000
Step-3 (ale. io ofo normal profitso gUtitog l o
Normal profit = avg capital emplayed x normal rate of retum 6u9, c00x 10°l
Normal profit 19942
Step- Calc.d ot Super profit thangwt2wibo =thog 9U2
Super profit adjusted avg prohit- hormal prott |27,000- 6u 900
Su per profit 62, l00 iubeop
Step-5 Cale. of goodull
years ofà pur h a s e yohorg op2 = iboor
Goo duill = Super profit Xno. of years of purthase = 62,100 xy
Goodwil :F248, yo0_ aitoo Y902o
9 Captali sahion of super proftsHhos
Grooduwill Su per proft 0Y 62, l00 |00
nomal rate of retunl0%
Goo duwill = F62, 000
0 Ahnurty method
Ghondwill = Super profrt x annul ty value = 62, l00 X3.78
Groodun ll = # 234,738 S1 aboor)
25 Step-) Cale. of adjusted avg. proft 26 Step
2015 2016 20|7t 3u
Partheulars -8l0 -A10s
Proftsoel 000,081 65,000 62,SoO 75,000o
less:
Less: Interest oh investment
coot (2500) (2500)2 (2500)
(50 ,000 x 5 ) o ) 72,500
62,500 60/000
6001 Adusted profits
Total adjuste d roftt = 714 5,000 Step
195,000 = 65,O00
Adjusted avg. prott > Total adjusted profit 3 Add:
No. of years
Step-2 Cale. of avg. caprtal employed
fized assetsoot 200, 000
Add: (urrent a ssets 210, 000o99L)
000,0L1
Less: (urrent liabilities sg (50,000)
360,000
Less: half profits of last year Less:
(72,500÷ 2) (36, 250)zhl o aitoyg ocd
Avg. capirtal employed = 323,75O000Sul)
Step-3 Calc. of hormal profit aiggoA
NGmal proft = QUg. captal emgloyed x nornal rate of retum
dol xocoui= 323, 750 x 10°% = 32,375o s p 0U hoyn
Step-y Calc. of Super profrt tg Less
Super proft = adjusted aug. proft - hormal profit 65.000- 32, 375
cOp, coo, Super profit = 32,625 otion og
Step-5 Cale. of qoodwillel,sanieti Step
years f qurhase No
Giooduwill = Super profitx no, of years of purchase = 32, b26 x y oo0
Groodwill 7130, 509
Caprtalisaton super profts Ste
Su
Groodwill Super proht
=

32, 625 =32, b25 J00s2 ilstg

ngrmal Yate of reum (00
L(aoodwll = (00 N laboor Step
32 6, 250 to sior lar
A Anuity nethod
hodwil! Super profit x ahn uity value
-a 32.625 x 3.78
Groodwill I23, 32 U)Khog Y9gU2 iubeon
 step-1 Calc. of adjusted avg. profit2
3u,000 t 38,000+ 36,000 4 uo,000 +38,000 =37, 200O
Less: abnormal (hacma in come7bobn
(20,000 x 5%) (1,000)uuhan
Adjusted avg. profit 36,200 boo
Step-2. Calc. of avg. captal employed
employedboo d
Assets
Add': Land & building D bgt 190, 000
l wOR-Plant & machinerys I-cio|42,000
Dab furniture 000,o5 C8000
Tob 68) Cashco (Cb)20,0yooo
Book debts o8doN 0d0 12,000 bnlzubA
Stock 2u1000= tiot bstzvibo Istol

Less: Liabllfhes
Debentures 0809(3o,000) bstavjoA
Trade creditrs aoo (uo, 000) 0 so)5S-tte
Provision for tax01 (161000) ba
Droposed dividend (30,000)S t n l ,000A
262,000ota
Less: half prohts of last yeaY erstds
(38,000 - (000 = 37000 2) (16,600)
Aug. captal emplayed= 2u3, 6 00
Step-3 Cale. of hormal profit 1291
Nonal profit = avg. capital 'emplayed x normal rate of return
= 243, S00x (°/o= 24, 350
Sstep-y Cale. of
Super profit tol
Super profit = adjusted avg. prafit - nomal profit 0 S0)
36200 - 241350 = I1, 850 IshoA
Step-5 Cale. of qooduilld Isrof
5 years of purehase 2142145tol 48 bnsbsb
Ghoodwill = Super profit x no. of years of purehase
I1, 850 x SToodeg siVS
(roodwill = F54, 2 5 0 o 008 PRT
-
 Gapitalisathon of Super prohts
,85o I1,850
Goodwill super proft C0=
normal rate of retun |0°%
Gioodwill = FI18,500ban
Annuity method
Ghoo owill = super proit hnuity value = M1& 50 x 3. 78
Gooduill=Fuu, 793 28
a
27. Step -) Cale. adjusted avg. profit
profit bns b
Parhculars o0020l0-1 20||-12 20/2-13t 2013-Iu 20/u -15
Drofts 000 270, 000 3I0,000 3u0,000 330000
360,000
eSs: Taration (36.5b) (I03,450) (I4, 350) Ci30,900) CI27,0S0) (136,600)
Adusted profits O00 (66 050 l90,650 209,00 202,450 221,s00
Total adjusted proft =7990,|5O Sol.@
Adjusted aug. proft = Total adusted profit q¡0, 15
No. of years 52dord
Adjusted qva. oroft = 198, 030 29hnsds S
Step-2 Cale. of avg. caprtal employedsbo
Fired assets l0,00,000t
Add:0 Current assetsos bersboib bosgofl
StockO,Sas 350, 000
Debtors
Cash & bank 200 , 0 0 0 o D 038)
0008US 2,000, 000 Ishop)
Less Liabilities b
Sundry cre ditorsslo(160,0o0) S
|, u0,000A
less: half profit of last year
(221, s00 2) (I101700) bstvibDt0u
ug. ca pYtal emplayed ,729,300 BS aE S
Step-3 (alc. ot hormal profits
Aug. Rate of dividend 8+ 10+ l2+ 15+Is
12°od
5 h a 9048
o

Drofit = avg. capital empley ed x rate of dividend return

Normalprofit
|1724, 300 X (2%
Normal proft 207, 5/6 esPeubocrd
 Step-u Cale. of Super proft
Super profit
profit = adjusted ava. proft-
hormal profft
|48)030 - 207, 5J6
Is nega tive,
Super prott - qu86 [: : Since Super profit caleulated]
goodwil is not
28
FYom the follouing into. , calc. the value of gooduill under
Capitalication of avg profits
(apitalisation ofof Super
super profits
Adjusted avg. avg. proft
profit for
for S5 years
years = F55, 000
Super proft = Flo,c00
Avg. capital emplayed = 7S00,000
Ngnal rate of return = 0%
0 Capitalisa hen of aug. rofrts
Step-l Cale. of adjusted avg Droft
Aduste d aug. roftt = 55, 000 (aiven)
Step -2 Cale. of Total value of busines
Total value of bu[iness = adjusted avg. profit 55,000
hommal rate of retum
55,000 |00 550, 000

Step-3 Cale. of gooduwill

Goodwill = Total value of busin ess - caprtal emplayed
550, 000 - 500,000 > Goodwill 750, 000
GCapitalisathon of super profits
Step-J Cale. of adusted avg. proftt
Adjusted avy. profit 55,000 (aiven)
Step-2 Cal. avg.
avg- capital emplayeod
of
Avg. capital employed = 50 500,000 (given)
Step-y Cale. of Super proft
Super profit l6, 000 (given)
Step-5 Calci of gooouil"
Ghoodwill Super broftt |O,000
hormal ate of retun
Gioodwill
Gecdwil! =FI00, 000