Question

State Ltd. is to be absorbed by Union Ltd. In order to determine the purchase consideration, the two companies consider it necessary to value the goodwill attached to the business of State Ltd. It is agreed that the basis of calculation of the goodwill shall be three years' purchase of the average annual super profits, the profits being averaged over five years. The profits of State Ltd. for the last five years before charging income tax at 50% are respectively * 4,00,000, 7 4,96,000, 7 3,52,000, 7 5,60,000 and 4,32,000 for each of the above five years.. Two of the directors of State Ltd. will be appointed to the board of Union Ltd. on absorption and it is considered that their services have been worth 48,000 each per annum. In the past, no charge was made against the profits of State Ltd. for the services of the directors concerned. The average capital invested in the net tangible assets over the period is 10,96,000. The normal retum to be expected from the particular type of business carried on by State Ltd. is 10%. Calculate the value of goodwill of State Ltd. based on the above information.​

Answer 1

Answer:

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