Valuation of goodwill

                                             Valuation of Goodwill
There are four method of valuation of goodwill:

  1. Average profit method
  2. Super profit mehod
  3. 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
 1.Goodwill by Average profit capitalisation method:
            = 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.
B.In Case of  Partnership firm:
  • 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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