NAME:- ROSHAN. J .

KOLHE

TOPIC:-METHODS FOR VALUATION OF GOODWILL

CLASS:- M . COM SEM 1
 1 :- Simple Profit Method
1.1:- Average Profit Method

1.2:- No. of year’s purchase of Average Profit Method

1.3:- Annuity of Average profit

The average adjusted profit is taken as the annuity. And the average adjusted profit is
multiplied by the present value of a rupee. The resulting amount is the total value of the business
From the total value deduct net tangible assets to get goodwill.
Steps to be taken:
a} Find out Adjusted Average profit.
b} Decide the present value of a rupee from the Annuity Table.
c} Multiply present value of a rupee and the adjusted average profit.
d} Deduct Net tangible assets from the present value of Adjusted Annual profit.
 2:- Super Profit Methods
Steps in Calculation of Goodwill
1. Find out capital employed.
2. Calculate normal profit.
3. Calculate average maintainable profit of the business.
4. Calculate the difference between average maintainable profit and normal profit.The
difference is the super profit.
5. Calculate goodwill as per the method adopted.

a} Super Profit:- Super profit is the excess of profit earned by the proprietor over the

average profit earned by similar concerns in the industry. It is an excess of F.M.P. over
normal profit.
 B} Normal profit :- It is average profit earned by similar concerns in the industry. It is
Decided on the basis of normal rant of return and the average capital employed during the year.

C} Normal Rate of Return:{N.R.R.} :- It is the average return expected by a shareholder

from his investment It is decided after taking into acconut the rate of return and the risk involved.It
depends on the nature of business and the element of risk involed therein. In general, the average
return on the problem readily. If it is not given, following formula may be used to decide it :
d} Average Capital employed: {A.C.E..} :- The term capital employed’ mens the present

value his investment. It is decided after taking into account the rate of return and the risk involved.
business Only trading assest are to be considered. Non- trading assest are those which are acquired
only because the firm has surplus funds. Investments are non-trading assets. However,
investments will be considered as trading assets if it is compulsory for the firm to acquire certain
investments. While calcalating capital employed on the basis of total assets, intangible assets

such as goodwill, useless patents and trade marks are to be excluded.

Investment in Government Securities made outside the business are to
be excluded as they are non-trading fictitious assets should be excluded.
Capital employed as decided from the Balance Sheet will be on a certain date only.
It is better to arrive at the average capital employed. It is the fair value of capital
Employed dueing the year. It is decided as follows
1} When information about the opening capital and closing capital is given :

2} When information about the opening is given :

3} When information about the closing capital is given :

4} When inforation about the assets and liabilities is given i.e Balance Sheet of that
particular Co. is given. A.C.E. is calcilated as follows :