Valuation of Goodwill Adjustments

ADJUSTMENTS IN VALUATION OF GOODWILL

1. Replacement value of fixed assets were Rs. 1,100 lakhs on 31.03.2014 and Rs. 1,250 Lakh on 31.03.2017 and Rate of Depreciation was 5% p.a.
• This replacement value considered in calculation of CAPITAL EMPLOYED and its depreciation in FMP

2. 50% of the Inventory is to be valued at 120% of its book value
• This adjustment effect in revalued figure in Capital Employed and
Include in the last year of FMP
• If there are 2 years given in the question hence it should be a revaluation of difference between opening and closing inventory.

3. 50% of the investment was trade investments.
• This adjustment indicate 50% investment is non trade hence it should not include in the CAPITAL EMPLOYED and reducing non trade income from FMP

4. Trade Receivables on 31st March 2017 included foreign trade receivables of $ 35,000 recorded in the books at Rs. 35 per US Dollar. The Closing exchange rate was $ 1 = 39
• The difference between opening and closing rate (i.e. 39-35=6) is included in the debtors

5. Trade Payables on 31st March 2017 included foreign trade payables of $ 60,000 recorded in the books at $1 = Rs. 33. The closing exchange rate was $1 = 39.
• The difference between opening and closing rate is adjust in the creditors.

6. In 2014-2015 new machinery costing Rs. 2,00,000 was purchased, but wrongly charged to revenue. This amount should be adjusted taking depreciation at 10% on reducing value method.
• in this adjustment machinery of Rs. 2,00,000 was Added in the profit of 2014-15 and depreciation @ 10% should be deducted afterwords.

7. Profits of the year 2016-2017 included Rs. 60 Lakhs of government subsidy which was not likely to recur.
• This subsidy must be deductable from FMP

8. Rs. 125 lakhs of research and development expenditure was written off to the profit and loss account in the current year. This expenditure was not likely to recur.
• This research and development expenditure was added in the FMP

9. Future maintainable profits (Pre-tax) are likely to be higher by 10%
• This adjustment increase FMP by 10% before tax.
10. In 2015-16 furniture with a book value of Rs. 1,00,000 was sold for 60,000
• In this adjustment loss of 40000 should be added in the profit of 2015-16

11. Normal rate of return expected is 15%
• NRR should be taken as 15% while calculating goodwill.

12. 10% trade receivables is bad.
• 10% trade receivable is reduced from debtors and less from profit of last year.

13. Market value of equity shares of the same denomination is Rs. 25 per share and in such company dividend is consistently paid during last 5 years @ 25% contrary to this, domestic ltd. Is having marked upward or downward trend in the case of dividend payment.
• This adjustment is given for calculation of NRR ie. Value of Share = D/K
or K = Dividend/Value of Share.
• Nominal rate of 1% may be added to risk premium in NRR because of uncertainty in payment of dividend by the company.

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