0
How to calculate goodwill according to the Proportionate method?
Wiki User
∙ 15y ago
it all depends on the nature of buissness for example a retail buisness liquor store 4 to 5 times of gross reciepts gas stations 30 times the net income
Wiki User
∙ 15y ago
Add your answer:
Earn +20 pts
How average profit method calculates goodwill?
Goodwill = Average Profits X Number of years of Puchase
How can I calculate good will of a company?
Prof. Dicksee has defined goodwill as " When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts." According to J. O. Magee " The capacity of a business to earn profits in future is basically what is meant by the term goodwill." According to Lord Lindley " The term goodwill is generally used to denote benefit arising from connections and reputation." Lord Eldon has defined goodwill as " Goodwill is nothing more than the probability, that the old customers will resort to the old place." In the words of Lord Macnaghten, " Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force, which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start." In the words of Dr. Canning, "Goodwill is the present value of a firm's anticipated excess earnings."Methods of Valuation of GoodwillThe following are the methods of valuation of goodwill of a firm: - ## Average Profit Method# Weighted Average Profit Method# Super Profit Method# Capitalization of Average Profit Method# Capitalization of Super Profit Method# Present Value of Super ProfitsMethod 1. Average Profit Method: Under this method goodwill is calculated on the basis of the average profit of previous years. The average profit is multiplied by the number of year's purchase. Goodwill = Average Profit x Number of Years Purchase Example: Calculate goodwill at twice the average profits of last four years' profits. The profits of the last four years were: # # Rs. 27,000 # Rs. 39,000 # Rs. 16,000 (Loss) # Rs. 40,000 Solution: Total Profit for last four years = Rs. 27,000+ Rs. 39,000-Rs. 16,000+Rs. 40,000 = Rs. 80,000 Average Profit = Rs. 80,000/4 = Rs. 20,000.Goodwill = Rs. 20,000 x 2 = Rs. 40,000.Method 2. Weighted Average Profit Method: This method is a modified version of the average profit method. Under this method the respective number of weights i.e. 1,2,3,4 multiplies profit of every year, in order to find out value product and the total of products is then divided by the total of weights in order to ascertain the weighted average profits. Goodwill = Weighted Average Profits x No. of years Purchase Weighted Average Profit = Total of Products of Profits/ Total of Weights Example: Calculate goodwill at twice the weighted average profits of last four years' profits. The profits of the last four years were:2001. Rs. 37,0002002. Rs. 29,0002003. Rs. 26,0002004. Rs. 40,000Solution:Years Profits Rs. Weight ProductRs.2001 37,000 1 37,0002002 29,000 2 58,0002003 26,000 3 78,0002004 40,000 4 160,000Total 10 333,000 Weighted Average Profit = Rs. 333,000/10 = Rs. 33,300 Goodwill = Rs. 33,300 x 2 = Rs. 66,600Method 3. Super Profit Method: When the actual profit is more than the expected profit or normal profit of a firm, it is called 'Super Profit.' Under this method goodwill is to be calculate of on the following manner: Goodwill = Super Profit x Number of Years Purchase Example: The books of a business showed that the capital employed on January 1, 2001 was Rs. 4,50,000 and the profits for the last five years were as follows: 2001-Rs. 40,000; 2002 -Rs. 50,000; 2003 - Rs. 60,000; 2004 -Rs. 70,000 and 2005 -Rs. 80,000. You are required to find out the value of goodwill, based on three years' purchase of the super profit of the business given that the normal rate of return is 10%.Solution: Total Profit of last five years = Rs. 40,000 + Rs. 50,000 + Rs. 60,000 + Rs. 70,000 + Rs. 80,000 = Rs. 300,000Average Profit = Rs. 300,000/5 =Rs. 60,000 Normal Profit = Rs. 450,000 x 10/100 = Rs. 45,000 Super Profit = Actual/Average Profit - Normal Profit Super Profit = Rs. 60,000 - Rs. 45,000 = Rs. 15,000 Goodwill = Rs. 15,000 x 3 = Rs. 45,000.Method 4. Capitalization of Average Profit Method: Under this method goodwill is difference between the total Capitalized value of the firm and the net assets of the firm. Goodwill = Capitalized Value the firm - Net Assets Capitalized Value of the firm = Average Profit x 100/ Normal Rate of Return Net Assets = Total Assets - External Liabilities Example: A firm earns Rs. 65,000 as its average profits. The usual rate of earning is 10%. The total assets of the firm amounted to Rs. 680,000 and liabilities are Rs. 180,000. Calculate the value of goodwill.Solution : Total Capitalized value of the firm = Rs. 65,000 x 100/10 = Rs. 650,000 Net Assets = Rs. 680,000 - Rs. 180,000 = Rs. 500,000 Goodwill = Total Capitalized value of the firm - Net Assets Goodwill = Rs. 650,000 - Rs. 500,000 = Rs. 150,000.Method 5. Capitalization of Super Profit Method: # # Calculate Capitalized value of the firm # Calculate required profit on capital employed by using the following formula: Normal Profit = Capital Employed x Required Rate of Return/100 # # Calculate average profit # Calculate super profit Goodwill = Super Profit x 100/Normal Rate of Return Example: Verma Brothers earn a profit of Rs. 90,000 with a capital of Rs. 4,00,000. The normal rate of return in the business is 15%. Use Capitalization of super profit method to value the goodwill. Solution: Normal Profit = Rs. 4,00,000 x 15/100 = Rs. 60,000 Super Profit = Rs. 90,000 - Rs. 60,000 = Rs. 30,000 Goodwill = Super Profit x 100/Normal Rate of Return = Rs. 30,000 x 100/15 = Rs. 200,000 Method 6. Present Value of Super Profit: Under this method, goodwill is estimated as the present value of the future super profits. The following steps are taken: # # Calculate the future super profits for next years # Choose the required rate of return # Calculate present value factors # Multiply present value factors with future super profits # The sum of product of present value factors and super profits is the value of goodwill. Example: A firm has the forecasted profits for the coming 4 years as follows:Years Profits Rs.1 80,0002 100,0003 90,0004 120,000 The total assets of the firm are Rs. 900,000 and outside liabilities are Rs. 300,000. The present value factors at 10% are as follows:Years Present Value Factor1 .92792 .80293 .70564 .6978 Calculate the Value of goodwill. Solution: Net Assets = Total Assets - Liabilities = Rs. 900,000 - Rs. 300,000 = Rs. 600,000Normal Profit = 10/100 x Rs. 600,000 = Rs. 60,000Years 1234Profits (Rs.) 80,000100,00090,000120,000Normal Profit 60,00060,00060,00060,000Super Profit 20,00040,00030,00060,000Present Value Factor .9279.8029.7056.6978Present Value of Super Profit 18,55832,11621,16841,868Goodwill = Rs. 18,558 + Rs. 32,116 + Rs. 21,168 + Rs. 41,868 = Rs. 113,710.
How do you calculate purchase consideration under net asset method?
under NET ASSET VALUE method all the ASSETS-LIABILITIES we need to calculate
How do you calculate fixed cost and variable cost given total cost and quantity?
We can calculate using following methods 1 - High-Low method 2 - Regression analysis method 3 - Graphical method
What is the advantage of the direct method of statement of cash flows?
It is easy to calculate
How average profit method calculates goodwill?
Goodwill = Average Profits X Number of years of Puchase
What is the need for calculation of goodwill.why an organition will adopt the calculation of goodwill by super profit method?
we know goodwill is anintangible fixed asset. So to find out the actual value of the company we need to the value of the goodwill. Among the other methods super-profit method is the method considering the realistic situation.
What are the non real numbers?
valuation method of goodwill and show detail
What difference between proportionate method of consolidation and equity method of consolidation?
If there is a joint venture between two companies. Each of the companies, under the equity method, only records half of the income from the joint venture on the income statement-nothing on balance sheet. With the proportionate consolidation method, the parent companies record half of the liabilities and assets from the joint venture.
Methods of calculating price elasticity of demand?
(1) Total outlay or Expenditure Method (2) Proportionate or Percentage Method (3) Point Elastic Method (4) Arc Elasticity of Method (5) Revenue Method
How can I calculate good will of a company?
Prof. Dicksee has defined goodwill as " When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts." According to J. O. Magee " The capacity of a business to earn profits in future is basically what is meant by the term goodwill." According to Lord Lindley " The term goodwill is generally used to denote benefit arising from connections and reputation." Lord Eldon has defined goodwill as " Goodwill is nothing more than the probability, that the old customers will resort to the old place." In the words of Lord Macnaghten, " Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force, which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start." In the words of Dr. Canning, "Goodwill is the present value of a firm's anticipated excess earnings."Methods of Valuation of GoodwillThe following are the methods of valuation of goodwill of a firm: - ## Average Profit Method# Weighted Average Profit Method# Super Profit Method# Capitalization of Average Profit Method# Capitalization of Super Profit Method# Present Value of Super ProfitsMethod 1. Average Profit Method: Under this method goodwill is calculated on the basis of the average profit of previous years. The average profit is multiplied by the number of year's purchase. Goodwill = Average Profit x Number of Years Purchase Example: Calculate goodwill at twice the average profits of last four years' profits. The profits of the last four years were: # # Rs. 27,000 # Rs. 39,000 # Rs. 16,000 (Loss) # Rs. 40,000 Solution: Total Profit for last four years = Rs. 27,000+ Rs. 39,000-Rs. 16,000+Rs. 40,000 = Rs. 80,000 Average Profit = Rs. 80,000/4 = Rs. 20,000.Goodwill = Rs. 20,000 x 2 = Rs. 40,000.Method 2. Weighted Average Profit Method: This method is a modified version of the average profit method. Under this method the respective number of weights i.e. 1,2,3,4 multiplies profit of every year, in order to find out value product and the total of products is then divided by the total of weights in order to ascertain the weighted average profits. Goodwill = Weighted Average Profits x No. of years Purchase Weighted Average Profit = Total of Products of Profits/ Total of Weights Example: Calculate goodwill at twice the weighted average profits of last four years' profits. The profits of the last four years were:2001. Rs. 37,0002002. Rs. 29,0002003. Rs. 26,0002004. Rs. 40,000Solution:Years Profits Rs. Weight ProductRs.2001 37,000 1 37,0002002 29,000 2 58,0002003 26,000 3 78,0002004 40,000 4 160,000Total 10 333,000 Weighted Average Profit = Rs. 333,000/10 = Rs. 33,300 Goodwill = Rs. 33,300 x 2 = Rs. 66,600Method 3. Super Profit Method: When the actual profit is more than the expected profit or normal profit of a firm, it is called 'Super Profit.' Under this method goodwill is to be calculate of on the following manner: Goodwill = Super Profit x Number of Years Purchase Example: The books of a business showed that the capital employed on January 1, 2001 was Rs. 4,50,000 and the profits for the last five years were as follows: 2001-Rs. 40,000; 2002 -Rs. 50,000; 2003 - Rs. 60,000; 2004 -Rs. 70,000 and 2005 -Rs. 80,000. You are required to find out the value of goodwill, based on three years' purchase of the super profit of the business given that the normal rate of return is 10%.Solution: Total Profit of last five years = Rs. 40,000 + Rs. 50,000 + Rs. 60,000 + Rs. 70,000 + Rs. 80,000 = Rs. 300,000Average Profit = Rs. 300,000/5 =Rs. 60,000 Normal Profit = Rs. 450,000 x 10/100 = Rs. 45,000 Super Profit = Actual/Average Profit - Normal Profit Super Profit = Rs. 60,000 - Rs. 45,000 = Rs. 15,000 Goodwill = Rs. 15,000 x 3 = Rs. 45,000.Method 4. Capitalization of Average Profit Method: Under this method goodwill is difference between the total Capitalized value of the firm and the net assets of the firm. Goodwill = Capitalized Value the firm - Net Assets Capitalized Value of the firm = Average Profit x 100/ Normal Rate of Return Net Assets = Total Assets - External Liabilities Example: A firm earns Rs. 65,000 as its average profits. The usual rate of earning is 10%. The total assets of the firm amounted to Rs. 680,000 and liabilities are Rs. 180,000. Calculate the value of goodwill.Solution : Total Capitalized value of the firm = Rs. 65,000 x 100/10 = Rs. 650,000 Net Assets = Rs. 680,000 - Rs. 180,000 = Rs. 500,000 Goodwill = Total Capitalized value of the firm - Net Assets Goodwill = Rs. 650,000 - Rs. 500,000 = Rs. 150,000.Method 5. Capitalization of Super Profit Method: # # Calculate Capitalized value of the firm # Calculate required profit on capital employed by using the following formula: Normal Profit = Capital Employed x Required Rate of Return/100 # # Calculate average profit # Calculate super profit Goodwill = Super Profit x 100/Normal Rate of Return Example: Verma Brothers earn a profit of Rs. 90,000 with a capital of Rs. 4,00,000. The normal rate of return in the business is 15%. Use Capitalization of super profit method to value the goodwill. Solution: Normal Profit = Rs. 4,00,000 x 15/100 = Rs. 60,000 Super Profit = Rs. 90,000 - Rs. 60,000 = Rs. 30,000 Goodwill = Super Profit x 100/Normal Rate of Return = Rs. 30,000 x 100/15 = Rs. 200,000 Method 6. Present Value of Super Profit: Under this method, goodwill is estimated as the present value of the future super profits. The following steps are taken: # # Calculate the future super profits for next years # Choose the required rate of return # Calculate present value factors # Multiply present value factors with future super profits # The sum of product of present value factors and super profits is the value of goodwill. Example: A firm has the forecasted profits for the coming 4 years as follows:Years Profits Rs.1 80,0002 100,0003 90,0004 120,000 The total assets of the firm are Rs. 900,000 and outside liabilities are Rs. 300,000. The present value factors at 10% are as follows:Years Present Value Factor1 .92792 .80293 .70564 .6978 Calculate the Value of goodwill. Solution: Net Assets = Total Assets - Liabilities = Rs. 900,000 - Rs. 300,000 = Rs. 600,000Normal Profit = 10/100 x Rs. 600,000 = Rs. 60,000Years 1234Profits (Rs.) 80,000100,00090,000120,000Normal Profit 60,00060,00060,00060,000Super Profit 20,00040,00030,00060,000Present Value Factor .9279.8029.7056.6978Present Value of Super Profit 18,55832,11621,16841,868Goodwill = Rs. 18,558 + Rs. 32,116 + Rs. 21,168 + Rs. 41,868 = Rs. 113,710.
Define proportionate consolidation?
It is referred to proportionate accounting. The proportionate method of accounting consolidation is often applied to joint venture business, where two or more business parties are sharing the same interest based on a contractual agreement. When dealing with proportionate accounting, one has to add investment in the joint venture in the left side of BS, and add each proportion of it to assets, liabilities and profit after joint venture.
What is accounting the characteristics of goodwill explain capitalization of profit method with the help of imaginary illustration?
It's difficult to place the exact value on goodwill and it will always involve expert judgement.
How did AOL determine the initial amount of goodwill to recognize in its merger with Time Warner?
purchase method
Can you calculate work by graphical method....if yes then can you calculate in square form?
yes
How will you calculate normality using specific gravity?
by bottle method
How do you calculate rainfall using the thiessen polygon method?
Thiessen Polygon method is a weighted average mean method used to calculate average rainfall. The catchment area is divided into subcatchments using the Thiessen polygon method.
