Valuation of Goodwill

Course Content and Description given below:

Valuation of Goodwill

Valuation of Goodwill Contents :

1 Goodwill is reputation of business

2 It is payment for nothing

3 Increase in profit earning capacity of the business

4 Goodwill is intangible assets

5 Goodwill is “real” it is not fictitious

6 Shown in the assets side of balance sheet under the heading non current assets

Meaning of Goodwill

Goodwill is real it is not fictitious

Example of fictitious assets :-

1. Expenses on issue of share/debenture

2. Discount on issue of share/debenture

3. Loss on issue of share/debenture

4. Preliminary expenses

5. Underwriting commission etc.

Types or classification of Goodwill :

(1) Purchased Goodwill

(2) Self goodwill/Non purchased Goodwill

Nature of Goodwill :

1) Cat goodwill  = value high

2) Dog goodwill  = value low

3) Rat goodwill = value zero

4) Strange goodwill = = value strange/uncertain

Factors affecting the value of Goodwill :

i. Internal factors

ii. External factors

Methods of valuation of Goodwill :

1. Average Profit Method

Meaning of Average Profit method

A. Simple Average Profit Method

B. Weighted Average Profit Method

2. Super Profit Method

Meaning of Super Profit Method

A. Simple Super Profit Method

B. Weighted super profit method

3. Capitalization Method

Meaning of Capitalization Method

Valuation of goodwill by capitalization of average profit method

Valuation of goodwill by capitalization of super profit method

4. Annuity method

Meaning of Annuity method

Valuation of goodwill by Annuity method

(1) If annuity rate is less than ₹ 1

(2) If annuity rate is more than ₹ 1

Some Important Questions for Practice

Illustration with Solution