Valuation of Goodwill

Goodwill

Valuation

1. Average Profit Method

• 10 + 20 +30

  ------------------ = 20

           3

• Here the goodwill is valued at an agreed number of ‘years’ purchase of the average profits of the past a few years

  
  

• Eg: Net profit of a business for the last 3 years was Rs. 10000, 20000 and 30000, the partners decided to calculate the goodwill based on 2 years purchase of average profit

   :. Average Profit = (10000 + 20000 + 30000) / 3 = 20000

Multiple Choice

The goodwill of the a firm is estimated at two years' purchase of the average profit of the last five years ending on 31st March, which are as follows:2014,₹15,000 (profit);2015,₹18,000(Profit),2016₹7,000(Loss); 2017 ₹10,000 (profit) and 2018,₹4,000 (Profit). Average profit of the firm will be

• 9400

• 8400

• 8000

• 7000

Multiple Choice

The goodwill of the a firm is estimated at two years' purchase of the average profit of the last five years ending on 31st March, which are as follows:2014,₹15,000 (profit);2015,₹18,000(Profit),2016₹7,000(Loss); 2017 ₹10,000 (profit) and 2018,₹4,000 (Profit). Calculate the value of the goodwill of the firm

• 8000

• 16800

• 18800

• 16000

Multiple Choice

Goodwill of the firm on the basis of two years purchase of average profit of the last three Years is ₹25,000. Find average profit

• 50,000

• 25,000

• 10,000

• 12,500

2. Weighted Average Profit Method

• Steps:

   

  1.Assign the weights for each year - 1, 2, 3 etc.

   

  2. Find the Product - Weight X Profit

   

  3. Find the Total of Products

   

  4. Divide the Total of Products by Total Weights

• Multiply the Weighted Average Profit X No. of Years Purchase

Multiple Choice

A firm's profit for the last five years were ₹20,000; ₹30,000; ₹40,000;₹50,000 and ₹60,000. Calculate the value of firm's goodwill on the basis of three years purchase of weaighted average profits after using weights of 1,2,3,4 and 5 respectively

• 46,666

• 1,40,000

• 40,000

• none of the above

Multiple Choice

A firm's profit for the last five years were ₹20,000; ₹30,000; ₹40,000;₹50,000 and ₹60,000. Calculate the weaighted average profits after using weights of 1,2,3,4 and 5 respectively

• 14,4000

• 16,667

• 40,000

• None of the abovve

Multiple Choice

A firm's profit for the last five years were ₹20,000; ₹30,000; ₹40,000;₹50,000 and ₹60,000. Calculate the total product of weighted average profits after using weights of 1,2,3,4 and 5 respectively

• 16,666

• 7,00,000

• 1,40,000

• 40,000

3. Super Profit Method

• Super Profit means the excess of the actual profits earned by a business unit over and above the normal return expected on investment in similar class of business. Under this method:

   Super Profit = Actual Profit – Normal Profit

  Normal Profit = Capital Employed x NRR / 100

  Goodwill = Super Profit X No. of years

  Actual Profit may be the Average Profit NRR = Normal Rate of

   Return

Multiple Choice

Average Profit - 20,000, Capital Employed – 200,000 and NRR = 8% Goodwill based on 2 years purchase.

• 8,000

• 4,000

• 16,000

• None of the above