Page 256 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 11: Valuation of Goodwill

The assets were revalued as under: notes
Land and Building ` 1,94,000, Machinery ` 1,18,000 and Furniture ` 1,000. No remuneration was
charged by A though he was actively engaged in the business.
Find out goodwill by Capitalisation Method after assuming the rate of normal return.
Solution

valuation of goodwill of the Business of mr. a
(a) capital employed:
` `

Land and Buildings at current price 1,94,000
Machinery at current price 1,18,000
Furniture at current price 1,000
Stock 8,000

Cash at Bank 50,000
3,71,000
Less: Sundry Liabilities:
Creditors 80,000
Bills Payable 20,000 1,00,000

Capital Employed at the end of the year 2,71,000
(B) Future Maintainable Profits:

40,000 + ` 42,000 + ` 45,000 + ` 50,000 + ` ` 53,000
Average Profits =
5
2,30,000
= = 46,000
5
Less: Remuneration of A (assumed) 10,000
Future Maintainable Profits 36,000

(c) capitalised value of Future Maintainable Profits at the normal rate of 10% (assumed)

` 36,000 100
×
= = = 3,60,000
10
(D) goodwill under capitalisation method:
Capitalised value of Future Maintainable Profits 3,60,000
Less: Capital Employed 2,71,000
Goodwill: 89,000

11.5.4 annuity method

When a purchaser acquires a business, he pays some amount for goodwill along with the amount
for net assets of the business. At the time of purchase of business, the purchaser thinks that
amount paid for goodwill would be recouped by him during the coming three or four years in the

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