Model: Capital employed and super profits The following is the balance sheet of Raj Co Ltd. as on 31…

Model: Capital employed and super profits The following is the balance sheet of Raj Co Ltd. as on 31 March 2010:

Liabilities

Assets

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Paid-up Capital:

Goodwill at cost

50,000

50,000 Shares of Rs.10 Each Fully Pad

5,00,000

Land & Buildings at Cost

2,50,000

Capital Reserve

30,000

(Less Depreciation)

Sundry Creditors

1,00,000

Plant & Machinery at Cost (Less

2,00,000

Provision for Taxation

70,000

Depreciation)

P&L A/c

50,000

Stock at Cost

1,50,000

Debtors: 1,00,000

Less: Provision

for Bad Debts 5,000

95,000

Cash at Bank

5,000

7,50,000

7,50,000

You are asked to value the goodwill of Raj Co Ltd. on the basis of 5 years’ purchase of super profits, for which the following information is supplied: Adequate provisions have been made in the accounts for income tax and depreciation. The rate of income tax may be taken at 50%. The average rate of dividend by the company for the past 5 years was 15%. The reasonable return on capital invested in the class of business done by the company is 12%.

 

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