19 December 2011
In CA-final new course exam june 2009, Q5 page 13 of suggested of ICAI. IN this question the examiner has required us to compute average capital employed... I want to ask why in suggested solution we have taken goodwill existing in the books as a part of avg. capital employed for the first and second year since we do not take any goodwill existing in books as part of capital employed....
please help out.. thanks in advance...
solution is copied but not in proper format..
Question 5 The Balance Sheet of R Ltd. for the year ended on 31st March, 2006, 2007 and 2008 are as follows: (Rs. in thousands) Liabilities 31.3.2006 31.3.2007 31.3.2008 3,20,000 equity shares of Rs.10 each, fully paid 3,200 3,200 3,200 General reserve 2,400 2,800 3,200 Profit and Loss account 280 320 480 Creditors 1,200 1,600 2,000 7,080 7,920 8,880 Assets Goodwill 2,000 1,600 1,200 Building and Machinery less, depreciation 2,800 3,200 3,200 Stock 2,000 2,400 2,800 Debtors 40 320 880 Bank balance 240 400 800 7,080 7,920 8,880 Additional information: (a) Actual valuations were as under Building and machinery less, depreciation 3,600 4,000 4,400 Stock 2,400 2,800 3,200 Net profit (including opening balance after FINAL EXAMINATION : JUNE, 2009 14 writing off depreciation, goodwill, tax provision and transferred to general reserve) 840 1,240 1,640 (b) Capital employed in the business at market value at the beginning of 2005-06 was Rs.73,20,000 which included the cost of goodwill. The normal annual return on average capital employed in the line of business engaged by R Ltd. is 12½%. (c) The balance in the general reserve on 1st April, 2005 was Rs.20 lakhs. (d) The goodwill shown on 31.3.2006 was purchased on 1.4.2005 for Rs.20 lakhs on which date the balance in the Profit and Loss account was Rs.2,40,000. Find out the average capital employed in each year. (e) Goodwill is to be valued at 5 year’s purchase of Super profit (Simple average method). Find out the total value of the business as on 31.3.2008. (16 Marks) Answer 1. Average Capital Employed at the end of each year 31.3.2006 Rs. 31.3.2007 Rs. 31.3.2008 Rs. Goodwill 20,00,000 16,00,000 12,00,000 Building and Machinery (Revaluation) 36,00,000 40,00,000 44,00,000 Stock (Revalued) 24,00,000 28,00,000 32,00,000 Debtors 40,000 3,20,000 8,80,000 Bank Balance 2,40,000 4,00,000 8,00,000 Total Assets 82,80,000 91,20,000 104,80,000 Less: Creditors 12,00,000 16,00,000 20,00,000 Closing Capital 70,80,000 75,20,000 84,80,000 Add: Opening Capital 73,20,000 70,80,000 75,20,000 Total 144,00,000 146,00,000 160,00,000 Average Capital 72,00,000 73,00,000 80,00,000 Since the goodwill has been purchased, it is taken as a part of Capital employed. 2. Total value of business Rs. Total Net Assets as on 31.3.2008 84,80,000 Less: Goodwill as per Balance Sheet 12,00,000 Add: Goodwill as calculated in Working Note 41,12,500 Value of Business 113,92,500 PAPER – 1 : FINANCIAL REPORTING 15 Working Note: Valuation of Goodwill (i) Future Maintainable Profit 31.3.2006 31.3.2007 31.3.2008 Rs. Rs. Rs. Net Profit as given 8,40,000 12,40,000 16,40,000 Less: Opening Balance 2,40,000 2,80,000 3,20,000 Adjustment for Valuation of Opening Stock - 4,00,000 4,00,000 Add: Adjustment for Valuation of closing stock 4,00,000 4,00,000 4,00,000 Goodwill written off - 4,00,000 4,00,000 Transferred to General Reserve 4,00,000 4,00,000 4,00,000 Future Maintainable Profit 14,00,000 17,60,000 21,20,000 Less: 12.50% Normal Return on average capital 9,00,000 9,12,500 10,00,000 (ii) Super Profit 5,00,000 8,47,500 11,20,000 (iii) Average Super Profit = Rs.(5,00,000 + 8,47,500+11,20,000) ÷ 3 = Rs.8,22,500 (iv) Value of Goodwill at five years’ purchase= Rs.8,22,500 × 5 = Rs.41,12,500.
CAclubindia
