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Valuation of Goodwill - Verification and Valuation of Assets and Liabilities,
Text Transcript from Video
in this video I am going to explain the
different methods of valuation of
goodwill so first let me explain the
basic concept of goodwill see goodwill
is an intangible asset ok goodwill means
the good name or reputation of the
organization goodwill is not generally
recorded in the books of accounts even
though it does exist in a business form
in fact goodwill should not appear in
the books of a business unless it has
been purchased or paid for and second
thing is it is necessary to bring it
into books of accounts in connection
with admission of a new partner or
retirement or death of an existing
partner so these are the various
circumstance where we need to prepare or
find the value of goodwill
so goodwill is a intangible asset since
it cannot be same or felter but
sometimes a goodwill is more valuable
asset than the tangible asset ok so
there are different methods are
available to calculate or to value
goodwill so here I am going to explain
three basic methods the first one is a
average profit method second one super
profit method and third one
capitalization method so under average
profit method again two subdivisions are
the first one is simple average second
one weighted average under super profit
method four methods are their year of
purchase of super profit sliding-scale
valuation of super profit capitalization
of super profit entity method so these
are the four different method which
comes on the super profit method and the
last one is capitalisation method now I
am going to solve different problems in
order to understand each and every
methods see the first one average profit
method and average profit method two
subdivisions are their simple average we
could abrogate I see the problem for
simple average on weighted average same
valuation of goodwill first method is
average profit method look at the
problem the following details are
available about the business of Navy
limiter profit for 2010
laughs 2011 1 lakh 25 2012 1 lakh 40
profit of 2010 have been reduced by
15,000 because boots were destroyed by
fire it is an unusual expenditure so we
need to add 15,000 along with this value
why because it is an unusual expense so
we need to add this amount along with
the profit for the 2010 next 2 point non
recurring income of 10000 is included in
the profit 2011 in 2011 profit 10,000
rupees is included with this which is
non recurring say if there is any non
recurring income it should be subtracted
from the profit so we need to subtract
this amount from one lakh 25 and x1
profit of 2012 into 10000 income on
investment so income of investment also
it's a non-recurring this income is not
from the business income so it is a
other sources so if there is any non
recurring income that should be
subtracted from the income so 10000 will
be subtracted from one lakh 40,000 next
one
Booth's have not been insured but it is
thought prudent to insure them in future
the insurance premium is estimated at
750 per year so this expense is not
included in the above three years profit
in future they are going to take
insurance policy for that they are going
to pay 750 as insurance premium so this
will be I expense a recurring extra so
this will be subtracted after finding
the average profit okay next one
reasonable remuneration of the
appropriate of the business is 12,000
per year but it has not been taken into
account for calculation of
above-mentioned profit so this is also
future expense they are going to charge
or they are going to pay twelve thousand
per year for remuneration of the
appropriate air of the business so this
will be subtracted from the average
profit so these are the two excellence
which is not included in the above three
is profit so in future after finding the
average profit we need to subtract 750
and twelve thousand then we can able to
find out the
are just an average profit that is add
just an average maintainable profit so
we need to calculate that first in order
to find out the goodwill so they ask you
to calculate goodwill on the basis of
four years purchase of the average
profit of last three years so faster
method is average profit method so
formula for goodwill is a average
maintainable profit into number of years
of purchase'
so number of years of purchase this
information will be given in the problem
only you need to find out the average
profit see if nothing is given regarding
adjustment means you can directly take
the total profit for three years and
divide by three you will be getting
average profit then after finding the
average profit you can multiply with the
number of years of purchase so look at
this problem calculation of goodwill on
the pace is off for years
purchase how many years four years of
purchase okay so number of years of
purchase is given so first thing you
need to find the average profit then
multiply with the number of years of
purchases then you can get the goodwill
so but in this problem we have some
adjustments regarding non recurring
income and non recurring expense if
there is any non recurring income or
expense that will be adjusted with the
profit in order to find out the average
maintainable profit calculation of
average maintainable scrofa CH look at
the problem profit 2010 how much one
lakh and adjustment is there regarding
2010 that is profit of 2010 have been
reduced by fifteen thousand because
goods were destroyed by fire it is an
unusual expense er so we need to add
unusual expense along with the profit in
order to find out the maintainable
profit for the future so 2010 profit how
much one lakh
and had unusual losses how much 15,000
unusual loss due to fire shattered along
with this now one lap 15,000 profit for
2010 in the same way for next year 2011
2011 1 lakh 25,000 just find any
adjustment regarding 2011 here say non
recurring income of 10000 is included in
the profit of 2011 I told you know if
there is any non recurring income that
will be subtracted in order to find out
the future maintainable profit that is
10000 is included now just subtract this
value from 125 1 lakh 25,000
- no recurring in gun violence
one lap 15,000 in the same way for 2012
also new 2012 profit 1 lakh 40,000
adjustments regarding 2002 LS here
profit of 2012 included 10000 income on
investment so this is also non recurring
income that is a non-operating income
this income is from outsider this is a
norm operating income this is not from
the business or this income from the
outside business so it is called as a
non-operating income this will be
subtracted from the profit one lakh
forty thousand - of H - non operating
non-operating income that is any income
from outside is caught non operating
which is not from the business so how
much ten thousand balance subtract
balance one lap thirty thousand now get
a total income for three years three lap
sixty thousand this is a total income
for three years it is total profit
now find the average profit average
profit is equal to three laps 60,000
divided by three is equal to one lakh
twenty thousand so this is an average
profit now we need to find out the
average maintainable profit so in order
to find out the average maintainable
profit just see if there is any future
expanse that will be subtracted from the
average profit for the problem goods
have not been insured but it is thought
prudent to insure them in future so the
insurance view is estimated at 750 per
year
so this excellence we are going to incur
in future so this will be subtracted
from the average profit less insurance
reign in Hamas 750 per year in the same
way a reasonable regulation of the
propraetor of the business is 12,000 per
year but it has not been taken into
account for calculation of
above-mentioned profit so in future they
are going to make payment to appropriate
for remuneration is reasonable
remuneration so twelve thousand rupees
now this will be subtracted from the
average profit memorization to profit or
how much twelve thousand so from one
lakh twenty thousand subtract sound
fifty and per thousand the total is 1
lakh seven thousand two fifty this is
average maintainable profit so now we
got this value now just go for
calculation of goodwill goodwill is
equal to average maintainable profit so
what is the average maintainable profit
one lakh seven thousand 250 into number
of years of purchase look at the problem
so number of years of purchases for
years calculate goodwill on the basis of
four years purchase of the average
profit for the last three years so
number of parties are many years for
years number of years of purchase for
years multiplied 1 lakh seven thousand
250 into four four lakh twenty nine
that's all so goodwill value is four
lakh twenty nine thousand according to
the average profit method the formula is
average maintainable profit if there is
any adjustment we need to find average
maintainable if nothing is given
regarding non recurring income or non
recurring expenses direct you can find
simple average profit as it is fine you
can easily find the average by adding
all the profit divided by number of
years then you can multiply with the
number of years of chaser the next
method is weighted average profit method
say the profit of up the lamented for
the last five years we're as follows
so five year profit is given two
thousand ten twenty thousand eleven
twenty two twelve twenty five thirteen
twenty eight fourteen thirty thousand
compute the value of goodwill of up the
limited on the basis of four years
purchase of the weighted average profit
after assigning weights of one two three
four and five serially to the profit se
according to weighted average profit
here the weights will be given for each
a profit so the for the first year one
second year to third year three fourth
year for and the last year five so these
are the weights which is given in the
problem
funny thing we need to find the weighted
average and multiply with the four years
purchase that is number of years a
purchase is given in the problem I
see the solution say the formula for
make an average method that is goodwill
is equal to weighted average profit in
two number of years of purchase so
number of years of a purchase is given
in the problem that is four years now we
need to calculate weighted average
profit I told you know which is given
for each here we need to find the
weighted average profit look at this
calculation calculation of weighted
average profit so five years profit is
given in the problem weights also given
for each year now you need to find the
product so in order to find the
prodigious multiply annual profit into
weitzer twenty thousand into one 20022
into two forty four thousand twenty five
degrees 75 28 into for one lakh twelve
thousand thirty into 550,000 now get the
total product for left one thousand
and total weights 15 there is 1 2 3 4 5
total 15 now find the weighted average
profit up later average profit is equal
to product ur dotted by total wage 20
6733 okay so this is the weighted
average profit now multiplied with the
number of years of purchase in order to
find the goodwill goodwill is equal to
weighted average profit is twenty six
thousand seven hundred and thirty three
number of years of purchases for which
is given in the problem so what is the
value 1 lakh six thousand nine thirty
two weighted average profit in two
number of years of purchase is equal to
goodwill first method average profit
method is over now let us see the second
method super profit method in that first
one next year of purchase of super
profit I see the problem for this look
at the problem purchase of super profit
method a firm earned net profit during
the last three years as follows two
thousand twelve thirteen fourteen is
given the capital investment of the firm
s1 love fifty thousand say capital
investment is capital employed it okay
second one is a fair return of the
capital have regard to the risk involved
is ten percentage that is nrr is given
10 percentage calculate the value of
goodwill on the basis of three years but
chase of supergravity so let us see the
solution for this according to purchase
also the profit method in order to find
out the goodwill there are four steps
are there first thing you need to find
the average expected profit just find
the total profit divided by number of es
you will be getting average profit and
after finding the average profit the
next step is you need to find the normal
profit so formula for normal profit is
capital investor that is capital
employed into the organization into
normal rate of return that is Inara
you will be getting normal profit and
after finding the average expected
profit and normal profit then
find the difference that is super profit
super profit is equal to average
expected profit - normal profit they are
about two calculations we have found no
so the difference between these two
thing is called super profit and after
finding the super profit just multiply
number of years of patches with super
profit in order to find the goodwill so
goodwill is equal to super profit into
number of years of purchaser first
calculation is calculating average
expected profit take the total profit
divided by number of years three total
profit first year fourteen second you
forty five thousand third year 50,000
noted by number of years three years so
what is average profit one left 35
thousand four and by three is equal to
forty five thousand average expected
profit as forty five thousand then go
for normal profit a formula for normal
profit is capital employed into n RR so
capital employed how much the capital
investment of the firm is 1 lakh fifty
thousand and n RR is ten percentage so
normal profit is equal to capital
employed into normal rate of return
capital employed one lakh fifty thousand
n are up ten percent H 15,000 we have
God's average profit and normal profit
now we can easily find the super profit
so profit is equal to average expected
profit - normal profit average expected
profit how much 45,000 o forty five
thousand - normal profit how much
fifteen thousand so what is the
difference
thirty thousand so we have got super
profit goodwill is equal to super
profits thirty thousand into number of
years of purchase so calculate the value
of goodwill on the basis of how many as
three years purchase of super profits a
number of years of purchases three years
into three so goodwill amount is ninety
thousand next method is a sliding scale
valuation of super profit
method this method of valuation of
goodwill is a slight variation of the
purchase of super profit method say
instead of multiplying the whole server
profit by a certain number of years a
grading scale is our octet for example
instead of multiplying the total super
profit into total number of years of
purchase we can divide in this way
faster ten thousand into three years
second ten thousand into two years third
ten thousand into one year then we'll be
getting sixty thousand as total goodwill
next method is capitalization of super
profit method let us see the problem for
this method capitalization of super
profit method say the average net profit
of a business as a gesture for valuation
of Goodwyn amounted to rupees Tula fifty
thousand
savage artistic properties Tula fifty
thousand is given in the problem the net
tangible assets employed where for the
valleys 20 lakhs so net tangible assets
also given how much 20 lakhs
assuming that 10 percentage represented
a fair commercial return it is a then RR
is 10 percentage normal rate of return
is 10 percent AJ so these are the
information is given in order to
calculate the goodwill according to
capitalization of super profit method
say calculate the amount of goodwill by
capitalizing super profit capitalization
of super profit method so according to
this method the goodwill formula is
super profit divided by n R so first we
need to find the super profit so what is
the form of a Sawbuck Ravitch average
profit - normal profit we need to find
average profit and normal profit then
the difference between these two is
called super profit so average profit is
given in the problem how much say the
average net profit of the business is
Tula 50000 average profit is given to
left 50000 savage profit is given in the
problem itself now you need to find the
normal profit so what is the form of a
normal profit capital employed into n RR
see the net tangible asset is called
capital employed how much 20 lakhs
n
NAR is 10 percentage so capital employed
20 lakhs
Inara 10 percentage 2 lakhs now find the
difference average profit is toll of 50
which is given in the problem normal
profit is 2 lakhs what is the difference
between these two 50000 so super profit
is super profit is average profit minus
normal profit average profit Toula 50
normal profit two lakhs defense fifty
thousand now we have got super profit
now you can apply the formula to find
out the goodwill so goodwill is equal to
super profit how much 50 thousand noted
by NR 10 percentage answer who pays 5
lakhs
so according to capitalization of super
profit method goodwill amount is 5 lakhs
okay the next one is annuity method from
the following information compute
goodwill as per anity method see these
are the information that is first one is
average capital employed is 15 lakhs NRS
that is normal rate of profit is 10
percentage profit for 2012 1 lakh 75
2013 1 lakh 16 2014 1 lakh 83 is profit
is given profit for 2013 has been
arrived after writing of abnormal loss
say if there is any abnormal loss that
will be added back along with the net
profit then for 2014 includes and
non-recurring incoming there is any non
recurring income it will be subtracted
from the total income after doing this
adjustment you can able to find out the
average profit then goodwill is to be
calculated on the basis of three years
but chase of super profit okay then the
present value of vanity is rupee 1 for 3
years at 10% a so these are the
information is required in order to find
out the entity factor so according to
this problem manatee value is given you
need not find
de facto Santa factor is given in this
problem you can just apply this factor
with the super profit in order to find
the goodwill according to and it a
method this is the formula for gourville
according to energy method that is
goodwill is equal to super profit into
an annuity factor okay so first we need
to find the super profit
okay annuity factor is given in the
problem itself so first you need to go
for calculation of super profit so what
is the formula for super profit average
profits
- normal profit calculation of average
profit look at the problem for the year
2012 how much profit 1 lakh 75 just set
whether any adjustments regarding 2012
so you two are this one is given one for
2013 and second one for 2014 so no
adjustments regarding 2012 so directly
you can take 1 lakh 75 thousand for 2012
how much one lakh 75 thousand the same
way profit for 2013 profit for 2013 1
lakh 60,000 but adjustment is given
profit for 2013 has been arrived after
writing off abnormal loss I told you
know if there is any abnormal loss it
will be added back along with the net
profit 15 thousand will be added add
abnormal loss profit for 2013 1 lakh 16
plus abnormal loss 15,000 tota 1 lakh 75
thousand profit for 2013 in the same way
profit for 2014 how much 2014 how much 1
lakh 80,000 and a judgment is there
profit for 2014 includes a a non
recurring income if there is any non
recurring income it will be subtracted
from the profit
1 lakh 80 thousand -
and recurring income how much 20,000
balance one lakh 60,000 that's all now
find the total file app 10,000 yeah now
in the average profit file at 10,000
driba hominy s3 use so one lakh seventy
thousand average profit is one left
seventy thousand now enter so good
profit is equal to average profit -
normal profit average profit is 1 lakh
70 then you need to find normal profit
calculation of normal profit what is the
formula for normal profits capital
employed into Inara
okay see average capital employed is 15
lakhs you can take a the ravaged capital
employed or capital and we both are same
only Cyprus capital employed how much 15
lakhs NRS normal rate of profit is 10
percentage 15 lakhs into 10 percentage
what is answer 1 lakh 50,000 normal
profit is 1 lakh 50,000
so super profit is equal to average
profit minus normal profit that is
20,000 now go for goodwill calculation
so goodwill is equal to super profit in
two and it if after super graph it is
20,000 enter a native factor just look
at the problem two point four eight six
eight two point four eight six eight
forty nine thousand seven thirty six
according to energy method see according
to an ET method if vanity factor is not
given in the problem means there is a
separate form not to calculate this say
the present value of an annuity of rupee
one for three years at 10% Asian let me
show how to find this value this is the
formula that is one minus hundred
divided by hundred plus R R means a rate
of percentage yen denotes a number of
years number of phases three years noted
by rate that is ten person is divided by
hundred C one minus 100 divided by 100
plus ten percent age ten how many years
3 years 3 noded by 10 percentage answer
is a 100 order by 110 there is one minus
hundred order by 110 power three zeros
by 10 by hundred answer is two point
four eight six eight in this way you can
able to find the a native factor so far
we have discussed the average profit
methods super profit method let us say
the last one that is capitalisation
method capitalisation method a form
earned one lakh fifty thousand as its
annual profit the rate of normal profit
being ten percent degree CNRS
in percentage the assets of the firm
amounted to rupees sixteen lakhs and
loved it is filer 20 fits in firm ation
they ask you to find out the value of
good will by capitalisation method say
according to capitalisation method the
formula for goodwill s total capitalized
value of the business
- net assets of the company so here you
need to find two things one is a total
capitalized value of business and net
asset the difference between these two
is called goodwill so there is a
separate formula for this one total
capitalized value of business is equal
to actual profit divided by an error
which is given in the problem itself
so just take actual profit / normal rate
of return to find out the total
capitalized value of the firm next one
is net asset formula is total assets
minus liabilities you can get the net
Isetta so first find out this one a firm
earned one lakh 50 thousand has its
annual profit the nrr is 10 percentage
total capitalized value of the firm s
actual profit divided by and our actual
profit one laughs fifty thousand NRS 10
percentage answer is 15 lakhs after
finding this next calculate net asset
formula s total assets minus liabilities
the assets of the for monetary base 16
lakhs liabilities file at 20,000 total
assets minus liabilities file at 20,000
difference 10 lakhs
80,000 so now we have got total
capitalized value of the form and net
asset now find the difference between
these two goodwill is equal to total
capitalized value of the business how
much 15 lakhs - net asset net asset is
10 lakh 80,000
what is the reference for lacks 20000
goodwill amount is for lack 20 according
to capitalisation method so far we have
discussed three different methods of
valuation of goodwill first one is
average profit method under that we have
discussed two things simple and waiter
and second one is super profit method
under that we have discussed four
different methods and the last one is
capitalisation method hope you'll
understand this concept thank you
different methods of valuation of
goodwill so first let me explain the
basic concept of goodwill see goodwill
is an intangible asset ok goodwill means
the good name or reputation of the
organization goodwill is not generally
recorded in the books of accounts even
though it does exist in a business form
in fact goodwill should not appear in
the books of a business unless it has
been purchased or paid for and second
thing is it is necessary to bring it
into books of accounts in connection
with admission of a new partner or
retirement or death of an existing
partner so these are the various
circumstance where we need to prepare or
find the value of goodwill
so goodwill is a intangible asset since
it cannot be same or felter but
sometimes a goodwill is more valuable
asset than the tangible asset ok so
there are different methods are
available to calculate or to value
goodwill so here I am going to explain
three basic methods the first one is a
average profit method second one super
profit method and third one
capitalization method so under average
profit method again two subdivisions are
the first one is simple average second
one weighted average under super profit
method four methods are their year of
purchase of super profit sliding-scale
valuation of super profit capitalization
of super profit entity method so these
are the four different method which
comes on the super profit method and the
last one is capitalisation method now I
am going to solve different problems in
order to understand each and every
methods see the first one average profit
method and average profit method two
subdivisions are their simple average we
could abrogate I see the problem for
simple average on weighted average same
valuation of goodwill first method is
average profit method look at the
problem the following details are
available about the business of Navy
limiter profit for 2010
laughs 2011 1 lakh 25 2012 1 lakh 40
profit of 2010 have been reduced by
15,000 because boots were destroyed by
fire it is an unusual expenditure so we
need to add 15,000 along with this value
why because it is an unusual expense so
we need to add this amount along with
the profit for the 2010 next 2 point non
recurring income of 10000 is included in
the profit 2011 in 2011 profit 10,000
rupees is included with this which is
non recurring say if there is any non
recurring income it should be subtracted
from the profit so we need to subtract
this amount from one lakh 25 and x1
profit of 2012 into 10000 income on
investment so income of investment also
it's a non-recurring this income is not
from the business income so it is a
other sources so if there is any non
recurring income that should be
subtracted from the income so 10000 will
be subtracted from one lakh 40,000 next
one
Booth's have not been insured but it is
thought prudent to insure them in future
the insurance premium is estimated at
750 per year so this expense is not
included in the above three years profit
in future they are going to take
insurance policy for that they are going
to pay 750 as insurance premium so this
will be I expense a recurring extra so
this will be subtracted after finding
the average profit okay next one
reasonable remuneration of the
appropriate of the business is 12,000
per year but it has not been taken into
account for calculation of
above-mentioned profit so this is also
future expense they are going to charge
or they are going to pay twelve thousand
per year for remuneration of the
appropriate air of the business so this
will be subtracted from the average
profit so these are the two excellence
which is not included in the above three
is profit so in future after finding the
average profit we need to subtract 750
and twelve thousand then we can able to
find out the
are just an average profit that is add
just an average maintainable profit so
we need to calculate that first in order
to find out the goodwill so they ask you
to calculate goodwill on the basis of
four years purchase of the average
profit of last three years so faster
method is average profit method so
formula for goodwill is a average
maintainable profit into number of years
of purchase'
so number of years of purchase this
information will be given in the problem
only you need to find out the average
profit see if nothing is given regarding
adjustment means you can directly take
the total profit for three years and
divide by three you will be getting
average profit then after finding the
average profit you can multiply with the
number of years of purchase so look at
this problem calculation of goodwill on
the pace is off for years
purchase how many years four years of
purchase okay so number of years of
purchase is given so first thing you
need to find the average profit then
multiply with the number of years of
purchases then you can get the goodwill
so but in this problem we have some
adjustments regarding non recurring
income and non recurring expense if
there is any non recurring income or
expense that will be adjusted with the
profit in order to find out the average
maintainable profit calculation of
average maintainable scrofa CH look at
the problem profit 2010 how much one
lakh and adjustment is there regarding
2010 that is profit of 2010 have been
reduced by fifteen thousand because
goods were destroyed by fire it is an
unusual expense er so we need to add
unusual expense along with the profit in
order to find out the maintainable
profit for the future so 2010 profit how
much one lakh
and had unusual losses how much 15,000
unusual loss due to fire shattered along
with this now one lap 15,000 profit for
2010 in the same way for next year 2011
2011 1 lakh 25,000 just find any
adjustment regarding 2011 here say non
recurring income of 10000 is included in
the profit of 2011 I told you know if
there is any non recurring income that
will be subtracted in order to find out
the future maintainable profit that is
10000 is included now just subtract this
value from 125 1 lakh 25,000
- no recurring in gun violence
one lap 15,000 in the same way for 2012
also new 2012 profit 1 lakh 40,000
adjustments regarding 2002 LS here
profit of 2012 included 10000 income on
investment so this is also non recurring
income that is a non-operating income
this income is from outsider this is a
norm operating income this is not from
the business or this income from the
outside business so it is called as a
non-operating income this will be
subtracted from the profit one lakh
forty thousand - of H - non operating
non-operating income that is any income
from outside is caught non operating
which is not from the business so how
much ten thousand balance subtract
balance one lap thirty thousand now get
a total income for three years three lap
sixty thousand this is a total income
for three years it is total profit
now find the average profit average
profit is equal to three laps 60,000
divided by three is equal to one lakh
twenty thousand so this is an average
profit now we need to find out the
average maintainable profit so in order
to find out the average maintainable
profit just see if there is any future
expanse that will be subtracted from the
average profit for the problem goods
have not been insured but it is thought
prudent to insure them in future so the
insurance view is estimated at 750 per
year
so this excellence we are going to incur
in future so this will be subtracted
from the average profit less insurance
reign in Hamas 750 per year in the same
way a reasonable regulation of the
propraetor of the business is 12,000 per
year but it has not been taken into
account for calculation of
above-mentioned profit so in future they
are going to make payment to appropriate
for remuneration is reasonable
remuneration so twelve thousand rupees
now this will be subtracted from the
average profit memorization to profit or
how much twelve thousand so from one
lakh twenty thousand subtract sound
fifty and per thousand the total is 1
lakh seven thousand two fifty this is
average maintainable profit so now we
got this value now just go for
calculation of goodwill goodwill is
equal to average maintainable profit so
what is the average maintainable profit
one lakh seven thousand 250 into number
of years of purchase look at the problem
so number of years of purchases for
years calculate goodwill on the basis of
four years purchase of the average
profit for the last three years so
number of parties are many years for
years number of years of purchase for
years multiplied 1 lakh seven thousand
250 into four four lakh twenty nine
that's all so goodwill value is four
lakh twenty nine thousand according to
the average profit method the formula is
average maintainable profit if there is
any adjustment we need to find average
maintainable if nothing is given
regarding non recurring income or non
recurring expenses direct you can find
simple average profit as it is fine you
can easily find the average by adding
all the profit divided by number of
years then you can multiply with the
number of years of chaser the next
method is weighted average profit method
say the profit of up the lamented for
the last five years we're as follows
so five year profit is given two
thousand ten twenty thousand eleven
twenty two twelve twenty five thirteen
twenty eight fourteen thirty thousand
compute the value of goodwill of up the
limited on the basis of four years
purchase of the weighted average profit
after assigning weights of one two three
four and five serially to the profit se
according to weighted average profit
here the weights will be given for each
a profit so the for the first year one
second year to third year three fourth
year for and the last year five so these
are the weights which is given in the
problem
funny thing we need to find the weighted
average and multiply with the four years
purchase that is number of years a
purchase is given in the problem I
see the solution say the formula for
make an average method that is goodwill
is equal to weighted average profit in
two number of years of purchase so
number of years of a purchase is given
in the problem that is four years now we
need to calculate weighted average
profit I told you know which is given
for each here we need to find the
weighted average profit look at this
calculation calculation of weighted
average profit so five years profit is
given in the problem weights also given
for each year now you need to find the
product so in order to find the
prodigious multiply annual profit into
weitzer twenty thousand into one 20022
into two forty four thousand twenty five
degrees 75 28 into for one lakh twelve
thousand thirty into 550,000 now get the
total product for left one thousand
and total weights 15 there is 1 2 3 4 5
total 15 now find the weighted average
profit up later average profit is equal
to product ur dotted by total wage 20
6733 okay so this is the weighted
average profit now multiplied with the
number of years of purchase in order to
find the goodwill goodwill is equal to
weighted average profit is twenty six
thousand seven hundred and thirty three
number of years of purchases for which
is given in the problem so what is the
value 1 lakh six thousand nine thirty
two weighted average profit in two
number of years of purchase is equal to
goodwill first method average profit
method is over now let us see the second
method super profit method in that first
one next year of purchase of super
profit I see the problem for this look
at the problem purchase of super profit
method a firm earned net profit during
the last three years as follows two
thousand twelve thirteen fourteen is
given the capital investment of the firm
s1 love fifty thousand say capital
investment is capital employed it okay
second one is a fair return of the
capital have regard to the risk involved
is ten percentage that is nrr is given
10 percentage calculate the value of
goodwill on the basis of three years but
chase of supergravity so let us see the
solution for this according to purchase
also the profit method in order to find
out the goodwill there are four steps
are there first thing you need to find
the average expected profit just find
the total profit divided by number of es
you will be getting average profit and
after finding the average profit the
next step is you need to find the normal
profit so formula for normal profit is
capital investor that is capital
employed into the organization into
normal rate of return that is Inara
you will be getting normal profit and
after finding the average expected
profit and normal profit then
find the difference that is super profit
super profit is equal to average
expected profit - normal profit they are
about two calculations we have found no
so the difference between these two
thing is called super profit and after
finding the super profit just multiply
number of years of patches with super
profit in order to find the goodwill so
goodwill is equal to super profit into
number of years of purchaser first
calculation is calculating average
expected profit take the total profit
divided by number of years three total
profit first year fourteen second you
forty five thousand third year 50,000
noted by number of years three years so
what is average profit one left 35
thousand four and by three is equal to
forty five thousand average expected
profit as forty five thousand then go
for normal profit a formula for normal
profit is capital employed into n RR so
capital employed how much the capital
investment of the firm is 1 lakh fifty
thousand and n RR is ten percentage so
normal profit is equal to capital
employed into normal rate of return
capital employed one lakh fifty thousand
n are up ten percent H 15,000 we have
God's average profit and normal profit
now we can easily find the super profit
so profit is equal to average expected
profit - normal profit average expected
profit how much 45,000 o forty five
thousand - normal profit how much
fifteen thousand so what is the
difference
thirty thousand so we have got super
profit goodwill is equal to super
profits thirty thousand into number of
years of purchase so calculate the value
of goodwill on the basis of how many as
three years purchase of super profits a
number of years of purchases three years
into three so goodwill amount is ninety
thousand next method is a sliding scale
valuation of super profit
method this method of valuation of
goodwill is a slight variation of the
purchase of super profit method say
instead of multiplying the whole server
profit by a certain number of years a
grading scale is our octet for example
instead of multiplying the total super
profit into total number of years of
purchase we can divide in this way
faster ten thousand into three years
second ten thousand into two years third
ten thousand into one year then we'll be
getting sixty thousand as total goodwill
next method is capitalization of super
profit method let us see the problem for
this method capitalization of super
profit method say the average net profit
of a business as a gesture for valuation
of Goodwyn amounted to rupees Tula fifty
thousand
savage artistic properties Tula fifty
thousand is given in the problem the net
tangible assets employed where for the
valleys 20 lakhs so net tangible assets
also given how much 20 lakhs
assuming that 10 percentage represented
a fair commercial return it is a then RR
is 10 percentage normal rate of return
is 10 percent AJ so these are the
information is given in order to
calculate the goodwill according to
capitalization of super profit method
say calculate the amount of goodwill by
capitalizing super profit capitalization
of super profit method so according to
this method the goodwill formula is
super profit divided by n R so first we
need to find the super profit so what is
the form of a Sawbuck Ravitch average
profit - normal profit we need to find
average profit and normal profit then
the difference between these two is
called super profit so average profit is
given in the problem how much say the
average net profit of the business is
Tula 50000 average profit is given to
left 50000 savage profit is given in the
problem itself now you need to find the
normal profit so what is the form of a
normal profit capital employed into n RR
see the net tangible asset is called
capital employed how much 20 lakhs
n
NAR is 10 percentage so capital employed
20 lakhs
Inara 10 percentage 2 lakhs now find the
difference average profit is toll of 50
which is given in the problem normal
profit is 2 lakhs what is the difference
between these two 50000 so super profit
is super profit is average profit minus
normal profit average profit Toula 50
normal profit two lakhs defense fifty
thousand now we have got super profit
now you can apply the formula to find
out the goodwill so goodwill is equal to
super profit how much 50 thousand noted
by NR 10 percentage answer who pays 5
lakhs
so according to capitalization of super
profit method goodwill amount is 5 lakhs
okay the next one is annuity method from
the following information compute
goodwill as per anity method see these
are the information that is first one is
average capital employed is 15 lakhs NRS
that is normal rate of profit is 10
percentage profit for 2012 1 lakh 75
2013 1 lakh 16 2014 1 lakh 83 is profit
is given profit for 2013 has been
arrived after writing of abnormal loss
say if there is any abnormal loss that
will be added back along with the net
profit then for 2014 includes and
non-recurring incoming there is any non
recurring income it will be subtracted
from the total income after doing this
adjustment you can able to find out the
average profit then goodwill is to be
calculated on the basis of three years
but chase of super profit okay then the
present value of vanity is rupee 1 for 3
years at 10% a so these are the
information is required in order to find
out the entity factor so according to
this problem manatee value is given you
need not find
de facto Santa factor is given in this
problem you can just apply this factor
with the super profit in order to find
the goodwill according to and it a
method this is the formula for gourville
according to energy method that is
goodwill is equal to super profit into
an annuity factor okay so first we need
to find the super profit
okay annuity factor is given in the
problem itself so first you need to go
for calculation of super profit so what
is the formula for super profit average
profits
- normal profit calculation of average
profit look at the problem for the year
2012 how much profit 1 lakh 75 just set
whether any adjustments regarding 2012
so you two are this one is given one for
2013 and second one for 2014 so no
adjustments regarding 2012 so directly
you can take 1 lakh 75 thousand for 2012
how much one lakh 75 thousand the same
way profit for 2013 profit for 2013 1
lakh 60,000 but adjustment is given
profit for 2013 has been arrived after
writing off abnormal loss I told you
know if there is any abnormal loss it
will be added back along with the net
profit 15 thousand will be added add
abnormal loss profit for 2013 1 lakh 16
plus abnormal loss 15,000 tota 1 lakh 75
thousand profit for 2013 in the same way
profit for 2014 how much 2014 how much 1
lakh 80,000 and a judgment is there
profit for 2014 includes a a non
recurring income if there is any non
recurring income it will be subtracted
from the profit
1 lakh 80 thousand -
and recurring income how much 20,000
balance one lakh 60,000 that's all now
find the total file app 10,000 yeah now
in the average profit file at 10,000
driba hominy s3 use so one lakh seventy
thousand average profit is one left
seventy thousand now enter so good
profit is equal to average profit -
normal profit average profit is 1 lakh
70 then you need to find normal profit
calculation of normal profit what is the
formula for normal profits capital
employed into Inara
okay see average capital employed is 15
lakhs you can take a the ravaged capital
employed or capital and we both are same
only Cyprus capital employed how much 15
lakhs NRS normal rate of profit is 10
percentage 15 lakhs into 10 percentage
what is answer 1 lakh 50,000 normal
profit is 1 lakh 50,000
so super profit is equal to average
profit minus normal profit that is
20,000 now go for goodwill calculation
so goodwill is equal to super profit in
two and it if after super graph it is
20,000 enter a native factor just look
at the problem two point four eight six
eight two point four eight six eight
forty nine thousand seven thirty six
according to energy method see according
to an ET method if vanity factor is not
given in the problem means there is a
separate form not to calculate this say
the present value of an annuity of rupee
one for three years at 10% Asian let me
show how to find this value this is the
formula that is one minus hundred
divided by hundred plus R R means a rate
of percentage yen denotes a number of
years number of phases three years noted
by rate that is ten person is divided by
hundred C one minus 100 divided by 100
plus ten percent age ten how many years
3 years 3 noded by 10 percentage answer
is a 100 order by 110 there is one minus
hundred order by 110 power three zeros
by 10 by hundred answer is two point
four eight six eight in this way you can
able to find the a native factor so far
we have discussed the average profit
methods super profit method let us say
the last one that is capitalisation
method capitalisation method a form
earned one lakh fifty thousand as its
annual profit the rate of normal profit
being ten percent degree CNRS
in percentage the assets of the firm
amounted to rupees sixteen lakhs and
loved it is filer 20 fits in firm ation
they ask you to find out the value of
good will by capitalisation method say
according to capitalisation method the
formula for goodwill s total capitalized
value of the business
- net assets of the company so here you
need to find two things one is a total
capitalized value of business and net
asset the difference between these two
is called goodwill so there is a
separate formula for this one total
capitalized value of business is equal
to actual profit divided by an error
which is given in the problem itself
so just take actual profit / normal rate
of return to find out the total
capitalized value of the firm next one
is net asset formula is total assets
minus liabilities you can get the net
Isetta so first find out this one a firm
earned one lakh 50 thousand has its
annual profit the nrr is 10 percentage
total capitalized value of the firm s
actual profit divided by and our actual
profit one laughs fifty thousand NRS 10
percentage answer is 15 lakhs after
finding this next calculate net asset
formula s total assets minus liabilities
the assets of the for monetary base 16
lakhs liabilities file at 20,000 total
assets minus liabilities file at 20,000
difference 10 lakhs
80,000 so now we have got total
capitalized value of the form and net
asset now find the difference between
these two goodwill is equal to total
capitalized value of the business how
much 15 lakhs - net asset net asset is
10 lakh 80,000
what is the reference for lacks 20000
goodwill amount is for lack 20 according
to capitalisation method so far we have
discussed three different methods of
valuation of goodwill first one is
average profit method under that we have
discussed two things simple and waiter
and second one is super profit method
under that we have discussed four
different methods and the last one is
capitalisation method hope you'll
understand this concept thank you
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