EXERCISE PROBLEMS

1) Hitesh and company decided to purchase a business. The profits for the last four
years are:
2006-Rs.60,000
2007-Rs.75,000
2008-Rs.72,000
2009-Rs.69,000.
The business was looked after by the management. Remuneration from alternative
employment if not engaged on the business comes to Rs.9000 p.a. Find the amount of
goodwill, if it is valued on the basis of 3 years purchase of the average net profit for the
last four years.

2) Following particulars are available in respect of the business carried on by X Ltd.

(a) Profits earned by X Ltd: 2007- Rs.50,000; 2008 -Rs.48,000; and 2009-Rs.52,000.
(b) Profits of 2008 is reduced by Rs.5000 due to stock destroyed by fire and profits
of 2007 included a non-recurring income of Rs.3000.
(c) Profits of 2009 include Rs.2000 income on investment.
(d) The stock is not insured and it is thought prudent to insure the stock in future.
The insurance premium is estimated at Rs.500 p.a.
(e) Fair remuneration to the proprietor [not taken in the calculation of profits] is
Rs.10,000 p.a.
You are required to compute the value of goodwill on the basis of 2 years purchase of
average profits of the last three years.
3) The following is the Balance sheet of the Excellent Traders, a concern owned by Mr.
Kalam as at 30th April, 2009:
Balance Sheet
LIABILITIES AMOUNT ASSETS AMOUNT
Creditors 76,080 Fixed assets 1,80,000
Capital 3,28,000 Currents assets 2,44,080
Reserve 80,000 Investment in Shares 60,000
4,84,080 4,84,080

The following net profits were earned which included a fixed income from investments
of Rs.4,000 per annum.
Rs.
th
Year ended 30 April, 2006 64,000
th
Year ended 30 April, 2007 72,000
th
Year ended 30 April, 2008 86,000
th
Year ended 30 April, 2009 90,000
 Standard rate of return on capital employed in such type of business is 8%.
Compute the amount of goodwill of the above business at three years purchase of the
average super profits for four years assuming that each year’s profit was immediately
withdrawn in full by the proprietor.

4) The following particulars are available in respect of the business carried on by Mr.
Thomas.
Rs.
a) Capital invested 50,000
b) Trading results:
2003 – profit 12,200
2004- profit 15,000
2005- loss 2,000
2006- profit 21,000
c) Market rate of interest on investments 8%.
d) Rate of risk return on capital invested in business 2%.
e) Remuneration of the proprietor from alternative employment [if not engaged in
business] per annum 3,600.
You are required to compute the value of goodwill on the basis of three year’s purchase
of the super profits of the business of the business calculated on the average profits of the
last four years.

5) From the following information, calculate the value of goodwill under super profits method.
⮚ Average capital employed – Rs.6,00,000
⮚ Net profits of the firm for the past 3 years were Rs.1,07,600, Rs.90,700 and Rs.1,12,500.
⮚ Rate of interest expected from capital having regard to the risk involved – 12%
⮚ Remuneration to partners for their services – Rs.12,000 p.a
⮚ Assets of the firm – Rs.7,54,762
⮚ Current liabilities - Rs.31,329
The firm would be able to maintain super profits for a period of next 3 years.

6) The Balance sheet of XYZ Ltd as on 31.3.2002 is as follows:

LIABILITIES Rs. ASSETS Rs.
8% 5,000 Preference 50,000 Goodwill 10,000
shares of Rs.10 each Fixed Assets 1,80,000
10,000 Equity shares of 1,00,000 Investments (5% Govt. 20,000
Rs.10 each Loan)
1,00,000 Current Assets 1,00,000
Preliminary expenses 10,000
Reserves [including Discount on debentures 5,000
provision for taxation 50,000
Rs.10,000] 25,000
8% Debentures 3,25,000 3,25,000
Sundry creditors
The average profit of the company [after deducting interest on debentures and taxes] is Rs.
31,000. The market value of the machinery included in fixed assets is Rs.5000 more. Expected
rate of return is 10%. Evaluate the goodwill of the company at five times of the Super Profits.

7) The following information is given:

● Average Capital employed Rs.1,50,000.
● Normal rate of return 10%.
● Present value of annuity of Re.1 for 5 years at 10% = 3.78.
● Net profits for five years: 1998-Rs.14,400; 1999-Rs.15,400; 2000-Rs.17,400;
2001-Rs.16,900 and 2002- Rs.17,900.
The profits included non-recurring profits on an average basis of Rs.1,000. Out of which it was
identified that even non- recurring profits had a tendency of appearing at the rate of Rs.600 per
annum.
You are required to calculate goodwill.
a) As per annuity method.
b) As per 5 year’s purchase of Super-profit method.
c) As per capitalization of super profit method.

8) Following is the Balance sheet of ABC Ltd., on 31st December, 2008.

LIABILITIES Rs. ASSETS Rs.

Equity share capital of Rs.10 Building
5,00,000 1,65,000
each Machinery
2,00,000 85,000
General Reserve Furniture
1,00,000 50,000
Profit and loss account Motor vans
60,000 1,00,000
Sundry creditors Investments(Market price 1,20,000)
20,000 1,00,000
Bills payable Stock
20,000 1,50,000
Provision for tax Debtors
80,000
Bank
1,70,000

9,00,000 9,00,000
Net Profit before tax:
2006- Rs.2,10,000; 2007-Rs.2,20,000; 2008- Rs.2,50,000. Rate of taxation 40%. Income from
investments may be taken at 6%. Normal rate of return on average capital employed is 15%.
Building is valued at Rs.1,80,000 and machinery at Rs. 90,000. Taking weighted average of
profits after tax as basis, calculate the value of goodwill based on
i) 5 years purchase of super profits.
ii) Capitalization of super profits
iii) Annuity of super profits taking annuity rate at 2.97 [ ignore additional depreciation on
building and machinery].

[ Answers:
1. Goodwill= 1,80,000
2. Rs.79,000.
3. Goodwill Rs.1,62,600.
4. Goodwill Rs.8,850
5. Rs.58,800.
6. AVG capital employed = 185000;SP = 11,500 GW =Rs. 57,500.
7. Annuity= Rs.3,780
Super profit= Rs.5000
Capitalisation of super profit= Rs.10,000
8. SP=39,380 i) 196,900 ii) 262533 iii) 116,958.6

VALUATION OF SHARES:
EXERCISE PROBLEMS

1. Balance sheet of ABC Co. Ltd as on 31.3. 2001.

LIABILITIES Rs. ASSETS Rs.
6% Preference 2,00,000 Fixed assets 4,00,000
shares of Rs.10 each
Equity shares of 3,00,000 Current assets 2,48,000
Rs.10 each
Reserves 5,000 Preliminary 10,000
expenses
Debenture 25,000 Discount on issue of 5,000
Redemption fund debentures
Investment 10,000 Profit and loss a/c 27,000
Fluctuation fund
Depreciation fund 10,000
5% Debentures 50,000
Creditors 90,000
6,90,000 6,90,000
Current assets include investments of Rs.50,000, the market value of which is Rs.48,000.
Debtors include in current assets are doubtful to the extent of Rs.5,000 for which no provision
has been made so far. Stock at the end did not include a return of Rs.1000. Debenture interest is
due for one year and preference dividends are in arrears for 2 years.
You are required to value the shares if

I. Preference shares have priority as to capital and arrears of dividend.

II. Preference shares have priority as to capital only.
III. Preference shares have no priority as to capital and dividend arrears.

2. The following figures were extracted from the books of M/s. P Ltd.
Share capital Rs.
9% Preference Shares of Rs.100 each 3,00,000
1,000 Equity shares of Rs.100 each, Rs.50 called up 50,000
1,000 Equity shares of Rs.100 each, Rs.25 called up 25,000
1,000 Equity shares of Rs.100 each, fully called up 1,00,000
Reserves and surplus 4,75,000
General Reserve 2,00,000
Profit and Loss account 50,000 2,50,000
7,25,000
On a fair valuation of all the assets of the company, it is found that they have an appreciation of
Rs. 75,000. 10% of the surplus assets would be allocated to preference shares.
Ascertain the value of each preference and equity share.

3. Following is the summarized Balance sheet of New India Co. Ltd as on 31.3.2001
LIABILITIES Rs. ASSETS Rs.
Share capital Goodwill
4,00,000 1,00,000
40,000 shares of Rs.10 each
Reserve fund 1,00,000 Fixed assets 4,50,000
Profit & loss a/c 35,000 Current assets 1,90,000
9% Debentures 1,00,000 Preliminary expenses 25,000
Current Liabilities 1,30,000
7,65,000 7,65,000
 For the purpose of valuation of shares, fixed assets were valued at Rs.5,00,000 and goodwill at
Rs.1,50,000. There is a necessity of R.B.D at 10% on Debtors of Rs.75,000. It is found that
stock was over valued by Rs.9,000.
The net profit for past three years were Rs.69,000, Rs.71,800, Rs.90,200 respectively after
taxation. Out of this, 20% was placed to reserve. The normal rate of return in the industry is
10%. Compute the fair value of shares.

4. The following is the summarized Balance sheet of Pratap Company Ltd. as at 31.12.2003
LIABILITIES Rs. ASSETS Rs.
30,000 Equity shares of 3,00,000 Fixed assets(including 2,20,000
Rs.10 each fully paid goodwill)
20,000 Equity shares of 1,50,000 Stock 2,00,000
Rs.10 each, Rs.7.5 per
share paid up
10,000 Equity shares of 50,000 Book debts 1,40,000
Rs.10 each, Rs.5 per
share paid up
General reserve 1,20,000 Cash at bank 1,40,000
Sundry creditors 80,000
7,00,000 7,00,000

The average profits for the past 4 years after charging income tax is Rs.1,00,000. Fair return on
investment is 10%. It is the practice of the company to transfer 20% of its profits to general
reserve. Compute the value of the equity shares under
(a) Net assets method
(b) Yield method
(c) Fair value method

5. Compute the value of shares by:

a) Net asset method
b) Yield method
c) Fair value method

BALANCE SHEET
LIABILITIES Rs. ASSETS Rs.
Share capital 8,00,000 Goodwill 50,000
80,000 shares of Rs.10
each
Reserve fund 1,00,000 Fixed assets 10,00,000
Profit & loss a/c 50,000 Current assets 4,00,000
5% Debentures 1,00,000
Creditors 3,00,000
Provision for tax 1,00,000
14,50,000 14,50,000

On 31-12-2008 fixed assets were valued at Rs.12,00,000 and goodwill at Rs.75,000. The net
profits for the last three years were Rs.75,000, Rs.78,000 and Rs.87,000 of which 20% was
placed to reserve. The rate of return is 10%.

6) From the following particulars, calculate the fair value of an equity share assuming that out of
the total assets, those amounting to Rs.41,00,000 are fictitious:
1. Share capital:
55,000 10% Preference shares of Rs.100 each, fully paid up.
55,00,000 Equity shares of Rs.10 each, fully paid up.
2. Liability to outsiders : Rs.75,00,000.
3. Reserves and surplus: Rs.45,00,000.
4. The average normal profit after taxation earned every year by the company during the
last five years, Rs.85,05,000.
5. The normal profit earned on the market value of fully paid equity shares of similar
companies is 12%.
[Answers:

1. a) 8.85 b) 9.65 c) 9.79

2. a) 197.50 (b) 147.50 (c) 122.50 (d) 110.83
3. a) 14.84 (b) 15.40 (c) 15.12
4. net assets a)12 b) 9.5 c) 7; yield a) 16 b)12 c)8.
5. Value of each share: i) Rs.14.69 ii) 8 iii)11.35

6. (a) 10.07 (b) 12.05 (c)11.06