Valuation of goodwill-ca final june 2009

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Shivashish (Querist)
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19 December 2011 In CA-final new course exam june 2009, Q5 page 13 of suggested of ICAI. IN this question the examiner has required us to compute average capital employed...
I want to ask why in suggested solution we have taken goodwill existing in the books as a part of avg. capital employed for the first and second year since we do not take any goodwill existing in books as part of capital employed....

please help out..
thanks in advance...

solution is copied but not in proper format..

Question 5
The Balance Sheet of R Ltd. for the year ended on 31st March, 2006, 2007 and 2008 are as
follows:
(Rs. in thousands)
Liabilities 31.3.2006 31.3.2007 31.3.2008
3,20,000 equity shares of Rs.10 each, fully paid 3,200 3,200 3,200
General reserve 2,400 2,800 3,200
Profit and Loss account 280 320 480
Creditors 1,200 1,600 2,000
7,080 7,920 8,880
Assets
Goodwill 2,000 1,600 1,200
Building and Machinery less, depreciation 2,800 3,200 3,200
Stock 2,000 2,400 2,800
Debtors 40 320 880
Bank balance 240 400 800
7,080 7,920 8,880
Additional information:
(a) Actual valuations were as under
Building and machinery less, depreciation 3,600 4,000 4,400
Stock 2,400 2,800 3,200
Net profit (including opening balance after
FINAL EXAMINATION : JUNE, 2009
14
writing off depreciation, goodwill, tax provision
and transferred to general reserve) 840 1,240 1,640
(b) Capital employed in the business at market value at the beginning of 2005-06 was
Rs.73,20,000 which included the cost of goodwill. The normal annual return on average
capital employed in the line of business engaged by R Ltd. is 12½%.
(c) The balance in the general reserve on 1st April, 2005 was Rs.20 lakhs.
(d) The goodwill shown on 31.3.2006 was purchased on 1.4.2005 for Rs.20 lakhs on which
date the balance in the Profit and Loss account was Rs.2,40,000. Find out the average
capital employed in each year.
(e) Goodwill is to be valued at 5 year’s purchase of Super profit (Simple average method).
Find out the total value of the business as on 31.3.2008. (16 Marks)
Answer
1. Average Capital Employed at the end of each year
31.3.2006
Rs.
31.3.2007
Rs.
31.3.2008
Rs.
Goodwill 20,00,000 16,00,000 12,00,000
Building and Machinery (Revaluation) 36,00,000 40,00,000 44,00,000
Stock (Revalued) 24,00,000 28,00,000 32,00,000
Debtors 40,000 3,20,000 8,80,000
Bank Balance 2,40,000 4,00,000 8,00,000
Total Assets 82,80,000 91,20,000 104,80,000
Less: Creditors 12,00,000 16,00,000 20,00,000
Closing Capital 70,80,000 75,20,000 84,80,000
Add: Opening Capital 73,20,000 70,80,000 75,20,000
Total 144,00,000 146,00,000 160,00,000
Average Capital 72,00,000 73,00,000 80,00,000
Since the goodwill has been purchased, it is taken as a part of Capital employed.
2. Total value of business Rs.
Total Net Assets as on 31.3.2008 84,80,000
Less: Goodwill as per Balance Sheet 12,00,000
Add: Goodwill as calculated in Working Note 41,12,500
Value of Business 113,92,500
PAPER – 1 : FINANCIAL REPORTING
15
Working Note:
Valuation of Goodwill
(i) Future Maintainable Profit 31.3.2006 31.3.2007 31.3.2008
Rs. Rs. Rs.
Net Profit as given 8,40,000 12,40,000 16,40,000
Less: Opening Balance 2,40,000 2,80,000 3,20,000
Adjustment for Valuation of
Opening Stock - 4,00,000 4,00,000
Add: Adjustment for Valuation of closing
stock 4,00,000 4,00,000 4,00,000
Goodwill written off - 4,00,000 4,00,000
Transferred to General Reserve 4,00,000 4,00,000 4,00,000
Future Maintainable Profit 14,00,000 17,60,000 21,20,000
Less: 12.50% Normal Return on average
capital 9,00,000 9,12,500 10,00,000
(ii) Super Profit 5,00,000 8,47,500 11,20,000
(iii) Average Super Profit = Rs.(5,00,000 + 8,47,500+11,20,000) ÷ 3 = Rs.8,22,500
(iv) Value of Goodwill at five years’ purchase= Rs.8,22,500 × 5 = Rs.41,12,500.

Shivashish

Shivashish (Querist)
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19 December 2011 https://www.caclubindia.com/forum/ca-final-old-course-june-09-suggested-ans-by-icai-49957.asp you can get suggested from this link