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Unit 11: Valuation of Goodwill

4. What is the importance of goodwill? What factors should be kept in mind at the time of notes
valuation of goodwill?
5. Describe the concept of goodwill and explain the various methods of its evaluation.
6. What are accounting characteristics of goodwill? Explain capitalisation of profit method
with the help of an imaginary illustration.
7. Explain the following terms:
(a) Super Profit
(b) Future Maintainable Profit

(c) Annuity Method of Super Profit
(d) Capitalisation of Maintainable Profits.
8. XYZ Co. Ltd. decided to purchase the business of ABC Co. for ` 2,00,000 on 1 January
st
2006. Its profits for the last four years are as under:
2002–` 50,000, 2003–` 62,500, 2004–` 60,000 and 2005–` 57,500
The business was looked after by the owner, the remuneration from alternative employment
if not engaged in the business, for the owner, comes to ` 7,500 p.a.
Find out the amount of goodwill if it is valued on the basis of three years’ purchase of the
average net profit of the last four years.
9. Ramesh sold his business to Raman. For the determination of purchase consideration,
calculate the value of goodwill taking into consideration the following factors:
(a) Goodwill should be valued at two years’ purchase of the average profits, which, for
the last three years are as:
2003–` 1,40,000, 2004–` 2,03,000, 2005–` 1,85,500.
(b) Abnormal loss of ` 7,000 due to theft has reduced the profit of the year 2003.

(c) The profit for the year 2004 includes abnormal profit of ` 12,000.
(d) A speculative and lottery profit of ` 17,000 was received and ` 35,000 as depreciation
on such machine which was destroyed by fire in the pervious year, have been
adjusted to the profit of the year 2005.
10. From the following information, calculate the value of goodwill taking three years’ purchase
of super profit:
(a) Average capital employed ` 9,00,000.
(b) Net trading profits for the preceding three years were: ` 1,61,400, ` 1,36,050,
` 1,68,750.
(c) Expected return on capital invested in the same type of business is 12%.
(d) Fair remuneration to the proprietor for his service is ` 18,000.
(e) Total assets ` 9,84,000 and Current liabilities ` 45,000.
11. A runs a chemist’s shop. His net assets as on 31 March, 2005 amounted to ` 10,00,000.
st
After paying a rent of ` 22,500 a year and a salary of ` 15,000 to the chemist, he earns a
profit of ` 1,05,000. His landlord, who happens to be an expert chemist, is interested in
purchasing the shop. 18% is considered to be a reasonable return on capital employed.
What can A expect as payment for goodwill?
12. Mr. Ram is desirous of selling his business to Ranu Ltd., and has earned an average profit
of ` 3,00,000 in the past. It is considered that such average profit fairly represents the profit
likely to be earned in the future except that:

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