Question

Suppose AB Plc pays Rs. 18 million in cash for firm XYZ. The money is raised by borrowing the full amount. The net fixed assets of firm XYZ, which carried on the books at Rs. 8 million, are appraised at Rs. 14 million fair market value. The working capital is Rs. 2 million, therefore, balance sheet assets are worth Rs. 16 million. What is the amount of good will?

Answer 1

Solution:

AB Plc pays Rs. 18 million in cash for firm XYZ.

The net fixed assets of firm XYZ, in books, are Rs. 8 million, but fair market value is Rs. 14 million.

Working capital: Rs. 2 million,

Therefore, Fair market value of balance sheet assets is worth Rs.16 million i.e. (14+2) million

Amount of goodwill: Price paid to acquire - Fair market value of its net identifiable assets

Amount of goodwill: Rs 18 Million - Rs 16 Million = Rs 2 Million

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