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C H A P T E R
C H A P T E R

Goodwill: Nature and Valuation

MEANING OF KEY TERMS USED IN THIS CHAPTER

1. Goodwill Goodwill is the value of good name or reputation enjoyed by a firm
that enables it to earn profit over and above the normal profits. It is
an intangible asset.

2. Purchased Goodwill Purchased Goodwill means goodwill for which consideration has
been paid.
3. Self-generated Goodwill Self-generated Goodwill is the goodwill that has been generated
by the business because of which it is able to earn higher profit.
4. Methods of Valuation of
Goodwill
(i) Simple Average It is calculated by taking the average profit for a specified number
Profit Method of years and multiplying it with the number of years of purchase.
Goodwill = Average Profit × No. of Years’ Purchase.
(ii) Weighted Average It is calculated by multiplying the profit for each year with the
Profit Method weight assigned to it. The amounts so arrived at are totalled and
divided by the total of weights. The weighted average profit is
multiplied by the number of years of purchase.
Goodwill = Weighted Average Profit × No. of Years’ Purchase.
(iii) Super Profit Method Super profit is the profit earned by the business that is in excess of
the normal profit. Goodwill is determined by multiplying the super
profit by the number of years’ purchase.
Goodwill = Super Profit × No. of Years’ Purchase.
Capitalisation Method
(iv) Capitalisation of Under Capitalisation Method, capitalised value of the business
Average Profit is determined by capitalising the average profit by the normal rate
of return. Out of the value so determined, value of net assets is
deducted, the balance amount is the value of goodwill.
Goodwill = Capitalised Value of Business – Net Assets.
(v) Capitalisation of Under this method, super profit is capitalised at the normal rate
Super Profit of return.
100
Goodwill = Super Profit × .
Normal Rate of Return