Page 253 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes 2. Average Capital Employed = ` 19,75,000 – 75,000
= ` 19,00,000

Average Capital Employed × Normal Rate of Return
3. Normal Profits =
100
×
19,00,000 8
= = 1,52,000
100
4. Super Profit = Average Future Maintainable Profits – Normal Profits
= ` 1,55,750 - ` 1,52,000
= ` 3,750

Value of Goodwill = Super Profit × No. of Years’ Purchase
= ` 3,750 × 5
= ` 18,750

Task Ascertain the value of goodwill of Y Company from the following information:
Calculate the value of goodwill of Y Company taking 3 year’s purchase of the average
profits of 4 years. Profits for the last 4 years after tax were: ` 10,000; ` 8,000; ` 5,000;
` 7,000.

11.5.3 capitalisation method

Under this method goodwill is valued by capitalising the future maintainable profits (average
profits) applying the normal rate of return. In capitalisation method it is estimated that much
amount of capital will be needed for earning a definite amount of profit at the normal rate of
return. There are two methods to find out the value of goodwill:

(a) Capitalisation of Super Profit Method.
(b) Capitalisation of Future Maintainable Profits (Average Profit) Method

Capitalisation of Super Profit

In this method, it is attempted to assess the capital required to earn the amount of super profit.
The capitalised value of super profit (excess of future maintainable profits over normal profit
on capital employed) is called goodwill. To ascertain the value of goodwill under this method,
Super Profit of the business and Normal Rate of Return are required and then the following
formula is used.

×
Goodwill as per Capitalisation Method = SuperProfit 100
NormalRateof Return
Capitalisation of Future Maintainable Profits (Average profit) Method or
capitalisation method

Under this method, goodwill is determined by deducting the actual capital employed in the
business from the capitalised value of future maintainable profits (adjusted average profits)
applying the normal rate of return. To ascertain the value of goodwill under this method, the
following steps are adopted:

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