Valuation of goodwill

Originally posted by : GITA RAYATATHA
	What is current years rectified profit for the purpose of calculating average capital employed, does it consider adj for current asset and if yes so when?

Before calculating the average profits the following adjustments should be made in the profits of the firm:

a. Any abnormal profits shoulld be deducted from the net profits of that year.

b. Any abnormal loss should be added back to the nat profits of that year.

c. Non operating incomes eg. income from investments etc should be deducted from the net profits of that year.

rectification does not include revaluation of current assets and liabilities it simply takes into account errors for example: let us say PAT is 300000 Rs tax rate is 50% and depreciation of Rs. 10000 has been less provided for then the procedure is as folows

PAT                                        Rs 300000

Add : Tax                              Rs  300000

PBT                                       Rs. 600000

Less: Rectification of errors

(Depreciation)                     Rs.10000

Rectified profits                  Rs 590000

half of rectified profits after tax    =   590000 x .50 x .50 =  147500 Rs.

When question specifically states that any item has to adjusted in books then it is a error or specifically states that it is a error and the above procedure will apply.

if still not clear let me know i will show you the same type of question.

regards

Dear Sir,

Please tell me the treatment of Non trade Income whether it is considered in calculation of rectified profit or not?

Can you please give an example for the same to get a better understanding