Page 276 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 12: Valuation of Shares

8,83,333 Notes
= = ` 22.08 per share
40,000
Illustration 3 (valuation of only one Type of Equity Share and valuation of goodwill by Super Profit
Method)
The net profit of the company whose balance sheet on 31 December, 2010 is given below, after
st
deducting all working expenses and provision for depreciation and taxation are:
2006 – ` 70,000, 2007 – ` 75,000, 2008 – ` 80,000, 2009 – ` 90,000, 2010 – ` 85,000.

Balance sheet as at 31 December, 2010
st
Liabilities ` Assets `
Capital (40,000 shares of ` 10 each) 4,00,000 Buildings 3,00,000
Profit and Loss Account 90,000 Machinery 80,000
Creditors 60,000 Debtors 2,00,000
Provision for Tax 30,000 Stock 32,000
Proposed Dividend 70,000 Cash 38,000
6,50,000 6,50,000
Buildings and Machinery were respectively valued at ` 3,10,000 and ` 85,000 on 31 December,
st
2010. The fair return in industry in which the company is engaged may be taken at 8%. Find out
the value of equity shares taking into consideration the value of goodwill based on three years’
purchase of the annual super profit.
Solution

(A) Valuation of goodwill
1. Capital Employed: `

Buildings 3,10,000
Machinery 85,000
Debtors 2,00,000
Stock 32,000
Cash 38,000

Total Assets 6,65,000
Less: Liabilities `
Creditors 60,000
Provision for tax 30,000

90,000
Capital Employed 5,75,000
2. Average Profits:

85,000 + 90,000 + 80,000
Average annual profits of the last 3 years =
3

2,55,000
= = 85,000
`
3

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