Page 242 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 11: Valuation of Goodwill

(b) Monopolised Business: If the previous profits of a business are good which are due notes
to the monopolistic nature of the business, the value of goodwill would depend
upon the fact whether such a monopolistic benefit is likely to continue or not. If such
benefit will continue in the future, the value of goodwill will be more.
(c) Import Licence: If a business is based upon the licence, new persons cannot enter into
this business easily, and the existing company will enjoy the monopoly and earn the
profits. In such a case, period of licence is an important factor for the determination
of the value of goodwill.
(d) Trade Name or Marks of the Business.
7. Know-how of the Business: Here, know-how means the knowledge to solve a particular
problem relating to production or marketing of the business. Generally, this knowledge
is acquired thought foreign collaboration, experience in the business, sound thinking or a
systematic research etc. If the business unit obtains such knowledge to face all its problems,
its goodwill will be greater.

8. Long-term Contracts: If a business unit has favourable long-term contracts for the supply
of raw materials or components or as regards sales, these will help in raising the value of
goodwill. If these contracts are obtained due to the personal skill of the proprietor, the
value to goodwill will not be affected by such existing contracts.
9. Trends of Profit of the Business: If the trend of profits of a business is steadily increasing,
this will increase the value of goodwill. If the trend of profit is decreasing or has been stable
in the previous years, the value of goodwill will decrease.
10. Political Protection: If political protection is being provided to a business or is expected to
be given in future, value of goodwill of that business will be higher.
11. Government’s Industrial Policy: If the attitude of the government’s industrial policy is to
promote a specific line of trade or industry, such a favourable future prospect for industry
increase the value of goodwill i.e., computer industry, cement industry etc.

self assessment

Choose the correct answer from the following options:
13. If a business has the average capital employed of ` 5,00,000, the adjusted average profit of
` 90,000, normal rate of return 10%, what will be the value of goodwill on the basis of three
years’ purchase of super profit?
(a) ` 4,10,000

(b) ` 1,20,000
(c) ` 2,70,000
(d) ` 5,90,000
14. If there is the following information with a company, what will be the normal rate of
return? Average Profit ` 50,000, Average Capital Employed ` 4,00,000 and goodwill of
` 30,000 is calculated on the basis of 3 years’ purchase of super profits.
(a) 15%

(b) 5%
(c) 10%
(d) 20%

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