Goodwill in general, it means reputation of Business.                                                                                                                                              


                                            Non – Trade Investment                           Trade Investment 

 The Main motive is to earn                     The main motive is to earn
                                               Business Benefit                                          financial Interest        

       ROCE and ROI

Return on Capital Employed               Return on Investment (ROI)
                                                (Owner’s + Loaner’s) funds                          Owner’s Fund

Net Profit before Interest                   Net Profit before Interest
(Owner’s + Loaner’s) funds                             Loaner’s Fund

 For healthy Business ROI should be Greater then ROCE

Note: Own goodwill is never shown in balance sheet. If it is shown then it may be purchase under AS-14(Accounting for Amalgamation) or under AS-26 (Accounting for intangible Assets). Following are the differences between AS-14 and AS-26:

ü  Accounted under Amalgamation

ü  Resulting due to Negotiation
ü  Write off within 5 years
ü  Accounted  under Intangible  Assets
ü  Desperately calculated
ü  Write off within 10 years

ü  While calculating goodwill always assume liquidation.
ü  Follow assets approach method. It means sale all assets and settles all Liabilities.
ü  Ignore proposed Dividend if given and reverse it back to that account from it is created.ü  Ignore non-trade investments only take trade investments.
ü  While calculating goodwill  if numbers of year is not mention then assume that the goodwill is purchase for 3 year

Methods to calculate Goodwill

                    Capitalization Method                                                   Super Profit Method

Market Capitalization Value                                             Future Maintainable Profit
Less: Closing Capital Employed                                        Less: Normal Profit Returns

Working Notes:

ü  Market Capitalization Value :

                 Average Capital Employed * 100
Normal Rate of Return
ü  Normal Profit Returns :

Average Capital Employed or closing capital Employed * Normal Rate
                                                                                             of Returns                                                                                                                                 
ü  Closing capital Employed :

All Assets – All Liabilities

ü  Future Maintainable Profit :

1.      Profit given in Balance sheet is profit after Tax, so convert that profit into PBT.
2.      After converting, adjust all abnormal items and also deducted interest income from non-trade Investments.
3.      After adjusting all abnormal items, give weights and calculate Future Maintainable Profits.

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