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BRILLIANT’S Long Term Financing and Valuation of Goodwill & Shares 227

CAPITALIZATION AVERAGE PROFIT METHOD
H¡${nQ>bmBOoeZ EdaoO àm°{’$Q> ‘oWS>

Illustration 3.1.16
From the information given below, calculate Goodwill as per capitalization of average prof-
its method:
ZrMo Xr J¶r gyMZm go EdaoO àm°{’$Q²>g {d{Y Ho$ H¡${nQ>bmBOoeZ Ho$ AZwgma JwS>{db H$s JUZm H$s{OE…

(i) Capital employed ` 14,00,000 / à¶w³V H¡${nQ>b < 14,00,000
(ii) Normal rate of profit 8% / bm^ H$s gm‘mݶ aoQ> 8%
(iii) Net profits before taxation (tax rate 40%) / Q>¡³goeZ Ho$ nhbo Hw$b bm^ (Q>¡³g aoQ>… 40%)
1st year: ` 2,20,000; 2nd year: ` 2,80,000; 3rd year: ` 2,60,000; 4th year: ` 3,00,000; 5th
year: ` 2,75,000.
(iv) Non-trading income of ` 10,000 and Debenture interest ` 20,000 on an average is in-
cluded in the Profit and Loss Account. / EH$ Am¡gV na < 10,000 H$r Zm°Z Q´>oqS>J B§H$‘ VWm <
20,000 H$m {S>~|Ma ã¶mO bm^ VWm hm{Z ImVo ‘| gpå‘{bV {H$¶m J¶m h¡&

Solution:

` 2,20,000 2,80,000 2,60,000 3,00,000 2,75,000    
Average Profit = = ` 2,67,000
5
Calculation of Average Maintainable Profit (After Tax)

Particulars `

Average Profit (Before Tax) 2,67,000
Add: Debenture Interest 20,000
2,87,000
Less: Non-Trading Income 10,000
Profit before Tax 2,77,000
Less: Tax @ 40% 1,10,800
Profit after Tax 1,66,200
Total Value of the Firm

Average Maintainable Profit after Tax 1,66,200
  100   100 = ` 20,77,500
Normal Rate of Return 8
Goodwill = Total value of the Firm – Capital Employed
= ` 20,77,500 – ` 14,00,000
= ` 6,77,500