Page 234 - Corporate Finance PDF Final new link

234 Corporate Finance BRILLIANT’S

You are required to compute the value of goodwill on the basis of 5 year's purchase of
super profits of the business calculated on the average profit of the last three years.
[Ans. Goodwill = ` 3,16,000]
3.1.2. Following is the Balance Sheet of King Ltd. as at 31.3.2016:
Balance Sheet of King Ltd. as at 31 March, 2016

Particulars Note No. Amount
(`)
I. EQUITY AND LIABILITIES
(1) Shareholder’s Funds:
(a) Share Capital - 25,000 Equity
Shares of ` 10 each fully paid 25,00,000
(b) Reserves and Surplus - Profit and Loss Account 3,50,000
(2) Share Application Money Pending Allotment: _
(3) Non-current Liabilities: _
(4) Current Liabilities:
(a) NPP 4,80,000
Short-term Borrowings - Bank Loan
(b) Trade Payables - Sundry Creditors 8.05,000
(c) Short-term Provisions
Provision for Income Tax 4,25,000
TOTAL 45,60,000
II. ASSETS
(1) Non-current Assets:
(a) Fixed Assets
(i) Tangible Assets -
Land and building at Cost 11,00,000
Plant and Machinery less Depreciation 10,00,000
(2) Current Assets:
(a) Inventories 15,00,000
(b) Trade Receivables - Book Debts 9,60,000
TOTAL 45,60,000
The company started operation on 1st April, 2011 with a paid-up capital of ` 25,00,000 as
mentioned above. Profits earned before providing for taxation have been as follows:
Year ending on 31 March:
2012 2013 2014 2015 2016
` 6,00,000 ` 7,50,000 ` 8,50,000 ` 9,50,000 ` 8,50,000
Rate of income tax is 50% ; Normal rate of return is 12%.
You are required to calculate the value of goodwill of King Ltd. by adopting capitalization
of average profit method. [Ans. Goodwill = ` 4,83,333]
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