The document covers various methods for valuing goodwill in business, including average profit, super profit, and capitalization methods. It provides detailed explanations and examples, including calculations for specific companies' profits over several years, showing how to determine goodwill based on those profits. Additionally, it discusses the implications of super profits and their sustainability in the business market.

1. Amity College of
Commerce & Finance
Name: Ashutosh Singh
Couse: Bcom(h) Sem: IV
Endrollment No: A35904616016

2. Topics to Be Covered
• Valuation of goodwill
1. Average Profit Method
2. Calculation of super profit method
3. Capitalization method

3. Meaning of goodwill:
Goodwill shows the value of a firm in terms of reputation. If a company has a
brand that has a certain reputation and status in the market, this can be measured
to have a lesser or greater value. This value is called goodwill.
Calculation of goodwill
 Average profit method
In this method goodwill is calculated by simply adding the total profit of last years divided by the no. of year.
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑓𝑖𝑡 =
𝑠𝑢𝑚 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡
𝑁𝑜. 𝑜𝑓 𝑦𝑒𝑎𝑟
𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑜𝑓𝑖𝑡 ∗ 𝑁𝑜. 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑜𝑓 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒

4. Valuation of goodwill
Average Profit Method
Simple Average Method
Weighted Average
Method
Super Profit Method
Year of purchase of super
profit
Sliding Scale Method
Capitalization of super
profit
Annuity Method
Capitalization Method

5. A Ltd agreed to buy the business of B Ltd. For that purpose Goodwill is to be
valued at three years purchase of Average Profits of last five years. The profits of
B Ltd. for the last five years are:
Year Profit/Loss
2005 10,000,000
2006 12,250,000
2007 7,450,000
2008 2,450,000 (Profit)
2009 12,400,000
Following additional information is available:
1. In the year 2008 the company suffered a loss of 1,000,500 due to fire in the factory.
2. In the year 2009 the company earned an income from investments outside the business
4,500,250.

6. Weighted Average Method
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑒𝑡ℎ𝑜𝑑 =
𝑊1 𝑃1 + 𝑊2 𝑃2 + 𝑊3 𝑃3 … … + 𝑊𝑛 𝑃𝑛
𝑇𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠
Value of Goodwill = Weighted Average Profit x Years Purchase
XYZ Co. Ltd. intends to purchase the business of ABC Co. Ltd. Goodwill for this
purpose is agreed to be valued at 3 years’ purchase of the weighted average
profits of the past four years.
Year Profit Loss
1998 30900
1999 45400
2000 35700
2001 48,000

7.  Super profit method
Year of Purchase of super profit
Steps for calculating Goodwill under this method are given below:
i) Goodwill = Super Profits x No. of years purchased
ii) Super Profits = Actual Profits – Normal Profits
iii) Normal Profits = Capital Invested X Normal rate of return
The capital employed as shown by the books of ABC Ltd is $ 50,000,000.
And the normal rate of return is 10 %. Goodwill is to be calculated on the
basis of 3 years puchase of super profits of the last four years. Profits for
the last four years are:
Year Profit/Loss
2005 10,000,000
2006 12,250,000
2007 7,450,000
2008 5,400,000

8. Sliding-Scale Valuation of Super Profit
It is based on the logic that the greater is the amount of super profits, the
more difficult it is to maintain it.
Higher profit will naturally attract competition and soon the firm’s ability to
make super profits is curtailed.
Calculate goodwill with sliding scale method.
If super profit is 12,000. For 3 years.

9. Capitalisation of Super Profits:
𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙 =
𝑆𝑢𝑝𝑒𝑟 𝑃𝑟𝑜𝑓𝑖𝑡
𝑁𝑜𝑟𝑚𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛
For example ABC Ltd earns a profit of $ 50,000 by employing a capital of $
200,000, The normal rate of return of a firm is 20%. To calculate Goodwill:

10. Annuity Method
Step 1 : Calculate Average Profit
Step 2 : Calculate Super Profit
Step 3 : Multiply Super Profit with annuity factor
The net profit of a company after providing for taxation for the past five
years is:
Year Profit/Loss
2009 40,000
2010 50,000
2011 30,000
2012 70,000
2013 80,000
The net tangible assets in the business are Rs. 4, 00,000 on which the normal rate of return is
expected to be 10%. It is also expected that the company will be able to maintain its super profits
for next five years. Calculate the value of goodwill of the business on the basis of an annuity of
super profits, taking present value of an annuity of Rs. 1 for five years at 10% interest is Rs. 3.78.

11.  Capitalisation Method:
I. Net Tangible Assets = Total Tangible Assets – Current Liabilities
II. Capitalised Value of Profit = Profit (Adjusted)/Normal Rate of Return
Value of Goodwill = Capitalised Value of Profit – Net Tangible Assets
A firm earns $40,000 as its average profits. The normal rate of rteturn is 10%. Total
assets of the firm are $1,000,000 and its total external liabilities are $ 500,000. To
calculate the amount of goodwill.