X Y, Z Co. Ltd intends to purchase the business of ABC & Co. Ltd.
Goodwill in the purpose
is agreed to be valued at 13 years’ purchase of the weighted average profits of the past 4
years.
2013 — 1
2014 — 2
2015 — 3
2016 — 4
The profits in these years were 2003 Rs. 30,900; 2004 Rs. 45,400; 2005 Rs. 35,700; and
2006 Rs. 48,000.
The following information was available:
(i) On 1.9.2014 a major repair was made in respect of a Plant at a cost of Rs. 8,000 and this
was charged to revenue. The said sum is agreed to be capitalised for Goodwill calculation
subject to adjustment of Depreciation of 10% p.a. on Diminishing Balance Method.
(ii) The Closing Stock for the year 2015 was overvalued by Rs. 3,000.
(iii) To cover the Management cost an annual charge of Rs. 10,000 should be made for the
purpose of Goodwill valuation.
You are asked to compute the value of Goodwill of the company.
2.
Liabilities Rs.
Share Capital
20,000 Equity Shares of Rs. 10 each 2,00,000
Profit and Loss Account 40,000
Depreciation Fund:
Building 5,000
Plant and Machinery 3,000 8,000
Sundry Creditors 22,000
Bills Payable 4,000
Provision for Taxation 6,000
2,80,000
The profits of the past four years (before providing for taxation) were:
2016 Rs. 20,000; 2017 Rs. 30,000; 2018 Rs. 36,000 and 2019 Rs. 40,000.
Compute the value of Goodwill of the company assuming that the normal rate of return for
this type of company is 10%. Income Tax is payable @ 50% on the above profits.
3.
The net profits of a company, after providing for taxation for the past five years,
are:
Rs. 20,000; Rs. 25,000; Rs. 15,000; Rs. 35,000; and Rs. 40,000.
The Net Tangible Assets in the business is Rs. 2,00,000 on which the normal rate of return
is expected to be 10%. It is also expected that the company will be able to maintain its
super-profits for the next ten years.
Calculate the value of Goodwill of the business on the basis of an annuity of super-profits,
taking the Present Value of an annuity of one rupee for five years at 10% interest as Rs.
3.78.
4.
A and B are partners sharing profits in the ratio of 3:2. They decided to admit C as a
partner from, 1st April, 2016 on the following terms:
i. C will be given 2/5th share of the profit.
i. Goodwill of the firm will be valued at two years' purchase of three years' normal average
profits of the firm.
Profits of the previous three years ended 31 st March were:
2016 Profit Rs.30,000 (after debiting loss of stock by fire Rs.40,000).
2015 Loss Rs.80,000 (includes voluntary retirement compensation paid 1, 10,000).
2014 Profit Rs. 1,10,000 (including a profit of 30,000 on the sale of fixed assets).
You are required to value the goodwill.
5.
A business earned average profits of Rs. 1,00,000 during the last few years. The normal
rate of return in similar type of business is 10%. The assets of the business were Rs.
10,00,000 and external liabilities was Rs. 1,80,000. Calculate the value of goodwill of the
firm by super profit method, if the goodwill is valued at 2. 1/2 years’ purchase of super
profits.
