Page 258 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 11: Valuation of Goodwill

(v) Remuneration of ` 10,000 p.a. to the proprietors is considered reasonable. notes
(vi) It is expected that super profit can be maintained for the next five years.

(vii) Present value of an annuity of one rupee for 5 years at 10% is ` 3.78.
Solution

valuation of goodwill by annuity method
(A) Adjusted Average Profits: ` `

Net Profits 2009 1,05,000
Net Profits 2010 97,000
Less: Bad debts recovered 900 96,100
Net Profit 2011 1,08,000
Total Profits of 3 years 3,09,100

Average Profits 1,03,033
Less: Proprietors’ remuneration 10,000
Adjusted Average Profits 93,033
(B) Normal Profits:

Average Capital Employed × Normal Rate of Return
=
100
5,00,000 × 10
=
100
(C) Super Profit:

`
Adjusted Average Profits 93,033
Less: Normal Profits 50,000
Super Profits 43,033

(D) goodwill:
Present Value of an annuity of ` 1 for 5 years at 10% is 3.78
Goodwill = ` 43,033 × 3.78
= ` 1,62,665
Illustration 9 (Valuation of Goodwill by All Methods)
From the following information find out goodwill:

(a) As per Annuity Method
(b) As per 4 years’ Purchase of Super Profit
(c ) As per Capitalisation of Super Profit Method

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