rea Nore raat ict i 2 ly, goodwill means the ‘good. 3 < -name’ dservices to the customers, th or the ‘reputation’ item tviees tothe customers, the customers whofe satis earned by a firm. Ifa firm ‘ particular busin ture. Thus, goodwill s the agree ein ana th ar fierely crabline theese estore attracts the cqsparisnn ton aoe MMOT EY Gther rman the sce nae eee sete defined as “the Present value ofthe firm's ante same trad. In echnical language seas describe goodwil but dificult to deine aes: mee a peteable form but it can be realised on the bas rll is Gn inane “ is asset. Ii thebusiness crac fa businessman is able to Te ae ent serait copay of eens relations’ and fame, then he earns more profits Thi che ae ‘scale d dwill. . This ability to earn extra profits fing to Shukla and Grewal, “Goodwi i hi rn all may b house in respect to Profits expected pao dened eee Prifitearned by understanding belonging to the same ae Goodwill has been defined in many ways : ig y ways : + According to Spicer and Pegler, “Goodwi ‘ 1, “Goo i oe et cireniages prcsed bei ote eee eater profits than the return normally to be expected i ea oe assets employed in the ieee on the op ee . paces ot Marrisey, “Goodwill is the present value of the anticipated excess oan of an enterprise is an asset which enables to earn ‘super-profits’ or ‘extra hove normal profits. In brief, super-profits earned from 2 business are termed goodwill. For example, if you start a business, you may eath profit say € 2 lakh. But if you earn a profit of 5 lakh in ‘a running business with its i goodwill (name), you may, SAY» Seen Ghehelp of the goodwill the old customers will ome ‘your firm and thereby ‘eodieay ‘increase. Hence, you earn extra profit with the help of goodwill. . is an asset like any other asset but provision for depreciation cannot be made on Poteet shame of G dwill. are the main characteristics of 800 Intangible Asset: Being 27 intangible ass ‘which are highly uncertain. ity of the Busint aluable asset 8. set, it has no physical existence ess: It enables a business if the business is earning af goodwill may ductuate widelY od of time. eanee : Sess is acquired for : ie TLS awill: Thi : ithoke over a period 2 aan a ee ae of creditors, bankers, that le positive eae nian! generates its various factors Bie it mers of the business. Thi the business gets sney of management, avourable location, todes oe aa ent, trade mark and patent eee competition, life js internally generated and depends upon the subjective j mt ited and depends the subj judgement of the nin the balance s! nee no price is paid fr : ae balance sheet, since no price is paid for it. This goodwill is of non- z ’ pAs-26 : “Internally generated goodwi ; srated goodwill shi . pan ets the reason for not recognising it as an me Ate bbe recognised as an asset as rally generated goodwil fan asset because it is not an identi Sheaes lentifiable resource controlled by the enterprise ra Classification of Goodwill : “Goodwill is nothi Beri resort egg old Place.” is nothing more than the eee that will is determined accordin eee ermit g to the nature of sat human being into four classes which is aed tate aaa ai mature of animals, goodwill may be classified into four categories : a Dog-Goodwill Cat-Goodwill Rat-Goodwill Rabbit-Goodwill 1.Dog-Goodwill : Dogs are attached to the master. A dog is @ faithful animal. It follows tor where he goes. Such customers ly, the customers will go to the old proprie personal goodwill which is not transferable. Hence, the value of goodwill of such i$ ‘business will not be very high. ather than to the master. Cat “‘.Cat-Goodwill : Cats are deeply attached to the house F. he house even ifthe master leaves the hows Simi visit the old business place even if the ownership changes: y goodwill. The value of goodwill of such ‘pusiness will to patronise the business. will : The nature of rat is quite different froma cat x ‘or to the house. Rat is very fle \d moves: frequently. Similarly, some Se Th flexible. This gives t neil to the place. They 82 exible. er tothe porn. 20. stm mo rarly there are customers WhO Such customers give rise be very high because or dog. Rat is not attached y alue of goodwi siness Wil e word, closeness refers to the Th is affected by the lO8eNE. fom wher®s ‘the time of of businessOrn pan th ih anther busine, on the dea pg concern is being vin the ease of partnership Firm, Ue nay arises in if retirement of @ partner. mean ee the profit sharing ratios between iv) Onthe agreed change In (vy) On dissolution of ae es i ‘amalgamation of firms. — x ‘ Wo ee conversion of partnership firm into a ave (ap In the case of a Joint Stock Company : io ‘On the amalgamation or absorption of the company. (ii) Onsale or purchase of es gir iii aluation of company’s equil . 5 Pa ie business of the company is taken over by the Government. (v) When controlling interest is acquired in another company. _ (vi) When after writing off the goodwill, Goodwill Account is again shown in the books fair price. partners, FACTORS DETERMINING GOODWILL The following factors affect the value of goodwill : (2) Nature of Business : It means prevailing competition concerned with this busin level of risk involved, government regulation nature of demand of the product in the market, affect the goodwill of the business. If the existing business is earning more than normal pr _ and has secured monopolistic position, the value of the goodwill will be more. : (2) Favourable Location : It is well known that centrally located firm " Gustomers. Availability of transportation facilities and vehicle parking facilit bieie ti : teh at place fevourable. In presence of these facilities goodwill of the will | Ss requiring less capital and getting more retul ; another business earning less profits with ah _ _ (4) Life of the Business : Life n Span of the busi ‘examples of it are Reliance and Tata group. ne s also increases the value of the goot! Management helps in incr@ value of goodwill.{goodwill will be high renee a tition is. il é - pes oo iy negtigible or there is no tip turn increases sales, Profits an To ce i and goodwill. coe a depends upon the t; Eaten pes of customer i ea ce a Tae : i:Condition : Political condition in the a 1] condition is sound and stable, the aa oo ifthe political goodwill of the business will be high Product is better acupted by the {Money Market Condition : If the moné aunt av of the god wl ieee a ee to ee ,of Service Centres : Adequate salts isc t increases sales, Profits and goodwill sarvice| cme (46) Other Factors + . 2 I) Good relations with employees, ive advertising, iid stax regions, (i) Good relations with suppliers, (0) Weaknesses in the management of CONCEPTS OF GOODWILL described under the following three heads = Concepts of Goodwill can be 1. Statutory or mn in the bas q competitors. gal Concept ee: ap of Gon] —<— Legal Concept : According to the practioners of law, good ‘othe old shop by the customer: Tn the words of Lord Eldon, the probability that the old customers ‘will resort to the ‘old place.” ill is limited to the customers jl is the ‘Goodwill ‘Thus, inion that goodwill does not come out Bons of all assets in the determination of sonsideration existencesified as Shown in the following charts (ap Super Profit Method. be further clas — Simple Average Profit Method : Simple years’ purchase of Average Prop, Method aia Weighted Average Profit Method ‘Average Profit Method No, of years’ purchase of Weighted = | Profits Metho@ t see _ Profits Method ae Super Profit Method 3 k<—— Capitalisation of Profit Method ‘Annuity Method or Present Value of Super| aaa ‘Super Profit Method PONG cu (@ Simple Average Profit Method (Number of years’ purchase of Average Pro Method) Under this method, goodwill is valued on the basis of agreed number of years’ purchas the average profits of the last few years. So this method involves two steps : (@ Calculation of average profit of the recent past years (say 3 years or 4 years or5 yest Total Profits Average Profit = ———-""S. mes abe ONO: of Yeara (Gi) Then the average profit is multiplied by the number ; ines ; of years’ purchase as agree by the partners to determine the value of goodwill, i : Goodwill = Average Profit x Number of Years’ Purt ti eared Average Profit Method) thebasis often eaual Partners in a firm. According to Partnership Deed so™ ae asisf three er eatthase of the average net profits of the last 5 yea" jth year € 80,000 0 ist ¥e2" € 20,000; 2nd year & 15,000; 3rd year’ 2 1000. Compute the value of the Goodwill ‘Total Profits for5 years =< 20,000 + =®1,10,000 Average Profit = 110,000 _ = 99 o99 : x Value of Goodwill = 22,000 x 3 = 66,009 Profit Method (Numbo © of years’ i © 15,000 +z 20,000 + x 25,000 +730! purchase of W‘Goodwill of Susmita Ltd. on the b; a ghts 1, 2,3, 4,5 and 6 serially totnen ee the profits. tation of Goodwill by Weighted Average Me thod y Weig] ge Met} Annual Profits Weighs eights e Ss 25,000 z 34,000 25,000 36,000 68,000 45,000 1,08,000 30,000 180,000 50,000 1,50,000 300,000 Product (Profit x Weight) Tot ua 8,31,000 falue of Goodwill = 39,751 x 5 = 1,97,855 WO enue PNET Basu bnormal Profit : If there is extra-ordinary oF abnormal gain in om that year’s profit. For ‘example, there was & profit of € 40,000 2, it should be deducted from the profit of 2012 in order to f the year 2012. or Loss : If there is some abnormal Joss in a year due to fire, d be added back to the profit of that year, In order d not be included in net ‘ome from investments should no! f ’ pee Er ‘fthis income is induced ut of operating activities. Hence, d from profit. é 5 a i 1 remuneration estimated tobe paid in sear, it should be deducted from average din past yeroks over the business without getting Peres the pall be deducted from of his ability,Publications Valuation of Goodwill ‘902 SBPD fat income which is not received so far Profit likely to opme in future: eangaieed our come ie, should be added to average profit. croft not likely to occur in future ; ATy income, which wed tobe rng . Prot maly to be discontinued in future, show du Raed so far but is ace be likely to occur or likely to reduce in future : If there ig, not tacoma of to be reduced ny expense in future then such amount of expense average profit. — to increase in future : If there is possibility to i expense ortorarise any new expense in future, this should be deducted from average, ‘9; ieome Tax : The past average current rates. Ttems to be adjus ted from profits of Specific year: Profit for the year (@ Abnormal Gain (-) wy) Gi) Abnormal Loss (+) w Gi) Income from Investments (-) wv) Gv) Non-operating Income (~) wy) (v) Non-operating Loss (+) ww (Loss on Sale of Assets) me ‘Actual Total Profits 77 Items to be adjusted from average Profit z Average Profit, Ww (@ Operating Expenses Expceted to be incurred in future (v) (ii) Operating incomes expeced in future Ww Ww Gii) Stopage of future earnings (iv) Managerial Remuneration (which was not paid earlier bul now has to be paid) wy (v) Managerial Remuneration : (a) If paid earlier and not to be paid in future of (b) If has to be paid with change rate/amount (vy) (vi) Income Tax vy) ‘Actual Average Profit YY ‘The amount of profit so obtained after due adju: is i » obtained stments is known as Maintainable Adjusted Profit. For ascertaining maintainable profit, a statement can be prepared a8) z Profit as per Statement of Profit & Loss Add ; 1. Abnormal expenses and losses debited in Statement of Profit & Loss but may not occur in future vs 2. Profit likely to come in future vy 8. Over-valuation of Opening Stock ww 4, Under-valuation of Closing Stock ww or Abnormal Profit of the year ay from non-trading assets vv & losses which may occur in future Wwluation of Closing Stock. luation of Opening Stock t or Future Maintainable Profit tae will make this point clear ; BASIS OF ADJUSTED Average Method AVERAGE PROFITS particulars are available i i i ae in respect of the business carried on by we 1,00,000 '96,000 co pratt of 2016 is reduced by € 10,000 due to stock destroyed by fire and 10 03015 income of ® 6,000. Oy een ‘a non- (@) Profits of 2017 include & 10,000 income on investment. The stock is not insured and it is thought to i is i {@ The sto ‘at € 1,000 p.a. ight to insure the stock in future. The insurance (6)Fair remuneration tothe proprietor (not taken in the calculation of profit) ist 19,000 p.a. Compute the value of goodwill on the basis of 2 years’ purchase of average profits of the Calculation of Average Profits z z 1,00,000 6,000 94,000 96,000 10,000 1,06,000 1,10,000 a AQi00B} e Premium to be paid in future 1,000 Future Remuneration to the Proprietor 19,000 fit (to be earned in future) y purchase of Average Profit = 80,000 x 2=€ 1,60,000 EJ sm .r’s business from 1st Jan., 2017. ‘The profits as disclosed by Tushar’s were as follows ng an abnormal gain of € 15,000) charging on. abnormal loss of @ 5,000) , = 10,000 aserogs carried on by M/s Tulsayay raeers ae interested > urease oars puree of the weighted average esd oR the preceding ‘hur years taking following points into consideratiog Profits of the past four years and weight assigned to them are given below : ON 2014 2015 2016 2017 Profits’ 43,000 53,600 50,000 65,800 3 4 dited to Statement of Profit & Loss cag ‘Weight a 2 @ ieee from Investments & 1,800 p.a. was cre {@) Closing stock for 2015 was over valued by & 4,600. Calculation of Actual Average Profit < Income from Investment on oe z 55,600 Income from Investment . Gi Over-valuation of Closing Stock oo 2 2016 4,800 6,600 SS om lovestrment 50,000 er-valuation of Opening Stock 1,800 48,200 4,800 lig yoretinent 65,800 alculation of Weighted Average Profit 1,800= Average P; = 51,800 x gn * NO. of years Purchase = 7 1,53,900 Javailable about a compan, Tax z z 90,000 25,000 35,000 30,000 45,000 43,000 ee y for the last five ‘years ; Transfer to Reserve z 15,000 15,000 15,000 15,000 20,000 managerial Remuneration zg 8,000 6,000 6,000 6,000 9,000 basis of the following further informations and calculate the value ee years’ purchase of the average profits for equity shareholders : at 10% of the fixed assets of € 5,00,000. ital of the company consists of 10% % 1,00,000 shares. 50%. Profit Depreciation z 50,000 50,000 50,000 50,000 50,000 Managerial Remuneration z 8,000 6,000 6,000 6,000 9,000 Profit before Tax z 32,000 29,000 19,000 39,000is of | calculation of the value pe the basis Tes by a reasonable nutty constittne super le une ie Agreed Number of Years’ Purch, a profit js the excess of average Profit oft a R | ans a reasonable retum it me: aig the same degree of busing yrofit firms hi ty yhich partners or investors i 4 may differ from business tows | LOYED ‘ysed to denote the total investment in thebus ne technical SenS°> the term ‘capital employed’ is lescribe the following * 1 of current assets an ed : Total m ‘net capital employ lities, or i d fixed assets at market vuly ed’ comprises the total ach joyed: red ; The tern fess its current liabi Jess Current Liabilities. ’s net capital employed meas : irene Capital Employed : Propricto ‘ Pon gr nvestmentin the business. This can bbe calculated as follows: oar SPE Net Capital Employed Current Assets - Outside Liabilities (both short-term and long-term ibd of Proprietor ; , ets, Se employed is one of the most important factor ofits arerelated tothe eapital employed to earn them. Gey ide metho! raed to calculate it 0 caleulate it (i) Assets side method and (ii) Liabilities si () ASSETS SIDE METHOD Proptietor’s net capi net capital employed is calculated as follow 7 , LS yh soot emem a. Ir market y, haga alte oF replacement g commission, Debit balaneam ae tateme ne, of ment of P& nares and _ Gi) LIABILITIES sipg MErHO, Lyete. should D employed is calculated as follows vv Net Capital Employed e Sm Bere of average capital employed has employed must be such as fairely represent the capital investment tis calculated a: follows : Opening Capital Employed + Closing Capital Employ 2 Closing Capital Employed - 1/2 of Current Year's Profit = Opening Capital Employed + /2 of Current Year's Profit 3) VS, AVERAGE CAPITAL EMPLOYED antante use the concept of net capital employed whereas the i se of average capital employed is more capital investments throughout the year. Students are tion mentioning the concept followed by them. ill under Super Profit Method fit or future maintainable profit of the business. profit is not given in the question, use the following x Normal Rate of Returnys + Long-term Det, fo the extent NOt Writtey, © owners (eat ones eo ‘Normal Profit. *, he ts ave rage Tg the SuPer profit by the it es ee pul PY” a) pur ee ire will be no goody, ployed js calculated. aie apital Employed in 4 send of accounting peg 4. If the actual aver ected. .e of super profit, fini t is exP' fit ana 10% normal Prof srisvalued at three ¥ purchas! pees ee il = Super Profit x No. of years’ purchase. 285,000 x 3 = =2 15,000 s. According to the ed at Dern partnership deed goodwill is valve Se orate nk five years. Thek : 9 the a “a faialdered ta ' Pent profit, The capital ofAverage Su x Seto = an No. of years Purchase Method) ations, calculate the value of Goodwill : tal employed in the business ¥ 8,00,000. of the firm for past three years were % 1,07,600; € 90,700 and expected from capital having regard to the risk involved 12%. to the partners for their services % 13,600 p.a. not charged to & L so far. [on the basis of 3 years’ purchases of the super profit. 3 z 3:10,800 _ ¢ 1,03,600 3 £1,03,600 ~ ¢ 19,600 (Fair Remuneration) = 790,000 al Rate of Return t Capital Employed x Norm: 100 10 10. - x 30,000 = 8,00,000 x =, Profit — Normal Profit 000 — 80,000 = 10,000 : ‘Number of years Purchase‘Total Profit 3 b js to be absorbed by Gti g years: purchase ofthe average Te, with due regard tonecessary 8 von income) for the last 5 years are : z 50,000 2014 55,000 2017 75,000 ee directors of G. Ltd. will be appointed to the Board of D. Ltd. on absorption andl that their services are worth © 5,000 each p.a. which have never been charged 4 ‘The average capital employed during the period is 1,80,000 and thee "from the particular type of business carried on by G. Ltd. is 10% p.a. value of Goodwill of G. Ltd. past 6 years 5,000 + % 45,000 +2 55,000 + Z 75,000)Valuation of Goodwill 50,000. His landlord is interested in acquii P Spotl ‘return on capital eine hai Acquiring the business 5% = to pe a eee of super Profit. fe value of goodwill based on 3 years’ —. tal a tion of Actual Maintainable Profit : Bea ‘Annual Profit ¥ : : 1,50,000 “Rent not to be paid in future {Gince landlord is himself buying the business) 20,000 : Expected Future Profit 1,70,000 Calculation of Average Capital Employed : z Net Assets 22,00,000 1/2 of Current year’s Profit {2ea,7,000.3) = 2 Average Capital Employed 71,15, 3, Calculation of Super Profit : * Expected Future Profit 1,70,000 Less : Normal Profit (Pasomens eae x 5) 1,05,750 64,250 4, Calculation of Goodwill = Super Profit x No. of Years’ Purchase = % 64,250 x 3 =%1,92,750 tration 12 From the following calculate - ‘employed and (c) Proprietor’s Average ne (a) Gross capital employed, (b) Proprietor’s net capital +t capital employed : Balance Sheet Particulars