Page 275 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes Balance sheet of X Ltd. as on 31 December, 2010
st
Liabilities ` Assets `
Share Capital: Fixed Assets:
40,000 equity shares of ` 10 each 4,00,000 Goodwill 75,000
Reserve and Surplus: Buildings 3,50,000
General Reserves 3,50,000 Machinery 3,00,000

Profit and Loss Account 50,000 Investment in 6% Loans 1,50,000
Debentures 1,60,000 Current Assets 80,000
Current Liabilities 50,000 Debtors 45,000
Preliminary Expenses: 10,000
10,10,000 10,10,000
Buildings and investment in 6% loans were revalued at ` 3,00,000 and ` 2,25,000 respectively
on December 31, 2010. For the purpose of valuation of shares, goodwill shall be taken at two
years’ purchase of the average profits of the last three years. The profits of the last three years are
` 60,000, ` 75,000 and ` 80,000.
Solution:
(a) Calculation for the Valuation of Goodwill:

+
60,000 75,000 80,000
+
Average Annual Profit of the last 3 years =
3
2,15,000
= = ` 71,667
3
Goodwill = Average Profit × No. of Years’ Purchase
= ` 71,667 × 2 = ` 1,43,333
(b) Calculation for Valuation of Shares
Net Assets: `
Goodwill 1,43,333
Buildings 3,00,000
Investments in 6% Loans 2,25,000
Machinery 3,00,000
Current Assets 80,000

Debtors 45,000
Gross total assets 10,93,333
Less: External Liabilities: `
Debentures 1,60,000
Current Liabilities 50,000 2,10,000
Net Assets or Intrinsic Value of Shares 8,83,333

Net Assets
(c) Intrinsic Value per Equity Share =
Number of equity shares

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