Valuation of Goodwill
There are four method of valuation of goodwill:
1.Average profit method:
There are two method:
1.Simple average profit method:
When profit fluctuates then this method is applied.
Goodwill = Average profit * No. of years purchased
Average profit = total profit or loss/ Total no. of years
2.Weighted average profit method:
When profit are in trends i.e. either increase or decrease then this method is applied.
Goodwill = Weighted average profit * No. of years purchased
Weighted average profit = Total weighted profit/ Total weight
Total weighted profit = Profit * Weight
2.Super profit method:
Goodwill = Super profit * No. of years purchased
Super profit = Average profit - Normal profit
Average profit = Total profit/Total no. of years
Normal profit = Capital invested * Normal rate of return / 100
Capitalisation means how much capital is required to get an estimated profit at normal rate of return.
under this method goodwill can be calculated on two basis:
= Average profit * 100/Normal rate of return - Net asset
2. Goodwill by Super profit capitalisation method:
=Super profit * 100/Normal rate of return
Needs for Valuation of Goodwill:
There are two cases:
A.In Case of Company:
There are four method of valuation of goodwill:
- Average profit method
- Super profit mehod
- Capitalisation method
1.Average profit method:
There are two method:
1.Simple average profit method:
When profit fluctuates then this method is applied.
Goodwill = Average profit * No. of years purchased
Average profit = total profit or loss/ Total no. of years
2.Weighted average profit method:
When profit are in trends i.e. either increase or decrease then this method is applied.
Goodwill = Weighted average profit * No. of years purchased
Weighted average profit = Total weighted profit/ Total weight
Total weighted profit = Profit * Weight
2.Super profit method:
Goodwill = Super profit * No. of years purchased
Super profit = Average profit - Normal profit
Average profit = Total profit/Total no. of years
Normal profit = Capital invested * Normal rate of return / 100
(Normal rate of return is the return which is expected by an investor from his investment.)3.Capitalisation method:
Capitalisation means how much capital is required to get an estimated profit at normal rate of return.
under this method goodwill can be calculated on two basis:
- On the basis of Average profit
- On the basis of super profit
= Average profit * 100/Normal rate of return - Net asset
2. Goodwill by Super profit capitalisation method:
=Super profit * 100/Normal rate of return
Needs for Valuation of Goodwill:
There are two cases:
A.In Case of Company:
- At the time of Amalgamation and absorption
- On sale of company
- When value of shares are not quoted in stock exchange.
- On the admission of a partner.
- On the death or retirement of a partner.
- On alteration of share of profit of the partner.
- On sale of partnership firm.
- On conversion of firm into a company.
- On Amalgamation of firm.
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