Valuation of GoodwillValuation of Goodwill Contents:1 Goodwill is reputation of business 2 It is payment for nothing 3 Increase in profit earning capacity of the business 4 Goodwill is intangible assets 5 Goodwill is "real" it is not fictitious 6 Shown in the assets side of balance sheet under the heading non current assetsMeaning of GoodwillGoodwill is real it is not fictitiousExample of fictitious assets:- 1. Expenses on issue of share/debenture 2. Discount on issue of share/debenture 3. Loss on issue of share/debenture 4. Preliminary expenses 5. Underwriting commission etc.Types or classification of Goodwill:(1) Purchased Goodwill (2) Self goodwill/Non purchased GoodwillNature of Goodwill:1) Cat goodwill = value high 2) Dog goodwill = value low 3) Rat goodwill = value zero 4) Strange goodwill = = value strange/uncertainFactors affecting the value of Goodwill:i. Internal factorsii. External factorsMethods of valuation of Goodwill:1. Average Profit MethodMeaning of Average Profit methodA. Simple Average Profit MethodB. Weighted Average Profit Method2. Super Profit MethodMeaning of Super Profit MethodA. Simple Super Profit MethodB. Weighted super profit method3. Capitalization MethodMeaning of Capitalization MethodValuation of goodwill by capitalization of average profit methodValuation of goodwill by capitalization of super profit method4. Annuity methodMeaning of Annuity methodValuation of goodwill by Annuity method(1) If annuity rate is less than ₹ 1(2) If annuity rate is more than ₹ 1Some Important Questions for Practice