Double Entry Book Keeping Ts Grewal Vol. i 2018 Solutions for Class 12 Commerce Accountancy Chapter 2 Goodwill: Nature And Valuation are provided here with simple stepbystep explanations. These solutions for Goodwill: Nature And Valuation are extremely popular among class 12 Commerce students for Accountancy Goodwill: Nature And Valuation Solutions come handy for quickly completing your homework and preparing for exams. All questions and answers from the Double Entry Book Keeping Ts Grewal Vol. i 2018 Book of class 12 Commerce Accountancy Chapter 2 are provided here for you for free. You will also love the adfree experience on Meritnation’s Double Entry Book Keeping Ts Grewal Vol. i 2018 Solutions. All Double Entry Book Keeping Ts Grewal Vol. i 2018 Solutions for class 12 Commerce Accountancy are prepared by experts and are 100% accurate.
Page No 2.20:
Question 1:
Goodwill is to be valued at three years' purchase of four years' average profit. Profits for last four years ending on 31st March of the firm were:
2016 − ₹ 12,000; 2017 − ₹ 18,000; 2018 − ₹ 16,000; 2019 − ₹ 14,000.
Calculate amount of Goodwill.
Answer:
Number of years’ purchase = 3
Page No 2.20:
Question 2:
The profit for the five years ending on 31st March, are as follows:
Year 2014–₹ 4,00,000 Year 2015–₹ 3,98,000; Year 2016–₹ 4,50,000; Year 2017–₹ 4,45,000; Year 2018–₹ 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.
Answer:
$\mathrm{Goodwill}=\mathrm{Average}\mathrm{Profits}\times \mathrm{Number}\mathrm{of}\mathrm{Years}\text{'}\mathrm{Purchase}\phantom{\rule{0ex}{0ex}}\begin{array}{c}\begin{array}{rcl}\mathrm{Average}\mathrm{Profits}& =& \frac{\mathrm{Total}\mathrm{Profits}}{\mathrm{Number}\mathrm{of}\mathrm{Years}}\\ & =& \frac{4,00,000+3,98,000+4,50,000+4,45,000+5,00,000}{5}\\ & =& \frac{21,93,000}{5}=\mathrm{Rs}4,38,600\end{array}\end{array}\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=4,38,600\times 4=\mathrm{Rs}17,54,400$
Page No 2.20:
Question 3:
Calculate value of goodwill on the basis of three years' purchase of average profit of the preceding five years which were as follows:
Year  2017–18  2016–17  2015–16  2014–15  2013–14 
Profits (₹)  8,00,000  15,00,000  18,00,000  4,00,000 (Loss)  13,00,000 
Answer:
Number of years’ purchase = 3
Page No 2.21:
Question 4:
Calculate the value of firm's goodwill on the basis of one and half years' purchase of the average profit of the last three years. The profit for first year was ₹ 1,00,000, profit for the second year was twice the profit of the first year and for the third year profit was one and half times of the profit of the second year.
Answer:
$\begin{array}{l}\text{Goodwill}=\text{AverageProfit}\times \text{No.ofyears'purchase}\\ \text{}=\text{2,00,000}\times \text{1.5}=\text{Rs3,00,000}\end{array}$
Working Notes:
WN: 1 Calculation of Profits of last three years
Year 
Profit 
1^{st} Year 
1,00,000 
2^{nd} Year 
2,00,000 (1,00,000$\times $2) 
3^{rd} Year 
3,00,000 (2,00,000$\times $1.5) 
Total Profit 
6,00,000 
WN: 2 Calculation of Average Profit
$\begin{array}{l}\text{AverageProfit}=\frac{\text{TotalProfitsforpastgivenyears}}{\text{NumberofYears}}\\ \text{}=\frac{6,00,000}{3}=\text{Rs2,00,000}\end{array}$
Page No 2.21:
Question 5:
A and B are partners sharing profits in the ratio of 3 : 2. They decided to admit C as a partner from 1st April, 2018 on the following terms:
(i) C will be given 2/5th share of the profit.
(ii) Goodwill of the firm be valued at two years' purchase of three years' normal average profit of the firm.
profits of the previous three years ended 31st March, were:
2018 – Profit ₹ 30,000 ( after debiting loss of stock by fire ₹ 40,000).
2017 – Loss ₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).
2016 – Profit ₹ 1,10,000 (including a gain (profir) of ₹ 30,000 on the sale of fixed assets).
you are required to value the goodwell.
Answer:
Goodwill = Normal Average Profit × Number of years' purchase
Year 
Actual Profit 
+ 
Abnormal Loss Nonrecurring 
– 
Abnormal Gain Nonrecurring 
= 
Normal Profit 
2018 
30,000 
+ 
40,000 
– 
Nil 
= 
70,000 
2017 
(80,000) 
+ 
1,10,000 
– 
Nil 
= 
30,000 
2016 
1,10,000 
+ 
Nil 
– 
30,000 
= 
80,000 
Normal Profit for 3 Years 
1,80,000 



Number of years’ purchase is 2
Goodwill = 60,000 × 2 = Rs 1,20,000
Page No 2.21:
Question 6:
X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z into partnership for 1/4th share in goodwill. Z brings in his share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2016 – Profit ₹ 50,000 (including profit on sale of assets ₹5,000).
2017 – Loss ₹ 20,000 (includes loss by fire ₹ 30,000)
2018 – Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
Calculate value of goodwill. Also, calculate goodwill brought in by Z.
Answer:
Year 
Actual Profit 
+ 
Abnormal Loss Nonrecurring 
– 
Abnormal Gain Nonrecurring 
= 
Normal Profit 
2016 
50,000 
+ 
Nil 
– 
5,000 
= 
45,000 
2017 
(20,000) 
+ 
30,000 
– 
Nil 
= 
10,000 
2018 
70,000 
+ 
Nil 
– 
18,000+8,000 
= 
44,000 
Normal Profit for 3 Years 
99,000 



Number of years’ purchase = 2
Page No 2.21:
Question 7:
A and B are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take C into partnership for 1/4th share on 1st April, 2018. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years whichever is higher. The agreed profits for goodwill purpose of the past five years are:
Year  2013–14  2014–15  2015–16  2016–17  2017–18 
Profit (₹)  14,000  15,500  10,000  16,000  15,000 
Answer:
Calculation of Average Profit for Five Years
Year 
Profit 
2013 – 14 
14,000 
2014 – 15 
15,500 
2015 – 16 
10,000 
2016 – 17 
16,000 
2017 – 18 
15,000 
Total Profit 
70,500 
Calculation of Average Profit for Four Years
Year 
Profit 
2014 – 15 
15,500 
2015 – 16 
10,000 
2016 – 17 
16,000 
2017 – 18 
15,000 
Total Profit 
56,500 
Page No 2.21:
Question 8:
Sumit purchased Amit's business on 1st April, 2018. Goodwill was decided to be valued at two years' purchase of average normal profit of last four years. The profits for the past four years were:
Year Ended  31st March, 2015  31st March, 2016  31st March, 2017  31st March, 2018 
Profit (₹)  80,000  1,45,,000  1,60,000  2,00,000 
(i) Abnormal loss of ₹ 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2015.
(ii) A fixed asset was sold in the year ended 31st March, 2016 and gain (profit) of ₹ 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2017 assets of the firm were not insured due to oversight. Insurance premium not paid was ₹ 15,000.
Calculate the value of goodwill.
Answer:
$\begin{array}{l}\text{Goodwill}=\text{AverageProfit}\times \text{No.ofyears'purchase}\\ \text{}=1,41,250\times 2=\text{Rs2,82,500}\end{array}$
Working Notes:
WN: 1 Calculation of Normal Profits
Year 
Profit/(Loss) (Rs) 
Adjustment 
Normal Profit (Rs) 
31 March, 2015 
80,000 
20,000 
1,00,000 
31 March, 2016 
1,45,000 
(25,000) 
1,20,000 
31 March, 2017 
1,60,000 
(15,000) 
1,45,000 
31 March, 2018 
2,00,000 
 
2,00,000 

5,65,000 
WN: 2 Calculation of Average Profit
$\begin{array}{l}\text{AverageProfit}=\frac{\text{TotalProfitforpastgivenyears}}{\text{NumberofYears}}\\ \text{}=\frac{5,65,000}{4}=\text{Rs1,41,250}\end{array}$
Page No 2.22:
Question 9:
X and Y are partners in a firm. They admit Z into partnership for equal share. It was agreed that goodwill will be valued at three years' purchase of average profit of last five years. Profits for the last five years were:
Year Ended  31st March, 2014  31st March, 2015  31st March, 2016  31st March, 2017  31st March, 2018 
Profit (₹)  90,000 (Loss)  1,60,000  1,50,000  65,000  1,77,000 
(i) The firm had gain (profit) of ₹ 50,000 from sale of machinery sold in the year ended 31st March, 2015. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of ₹ 20,000 incurred in the year ended 31st March, 2016 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2016 amounting to ₹ 1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.
Calculate the value of goodwill.
Answer:
$\begin{array}{l}\text{Goodwill}=\text{AverageProfit}\times \text{No.ofyears'purchase}\\ \text{}=1,00,000\times 3=\text{Rs3,00,000}\end{array}$
Working Notes:
WN: 1 Calculation of Normal Profits
Year 
Profit/(Loss) (Rs) 
Adjustment 
Normal Profit (Rs) 
31 March, 2014 
(90,000) 
 
(90,000) 
31 March, 2015 
1,60,000 
(50,000) 
1,10,000 
31 March, 2016 
1,50,000 
20,000 
1,70,000 
31 March, 2017 
65,000 
85,000* 
1,50,000 
31 March, 2018 
1,77,000 
(17,000) 
1,60,000 

5,00,000 
* Adjustment Amount
Overhauling cost of second hand machinery wrongly accounted as expense instead of capital expenditure. Profit to be increase by Rs 1,00,000 
1,00,000 
Depreciation to be debited from P&L A/c $(1,00,000\times \frac{20}{100}\times \frac{9}{12})$ 
(15,000) 
Amount to be added back 
85,000 
WN: 2 Calculation of Average Profit
$\begin{array}{l}\text{AverageProfit}=\frac{\text{TotalProfitforpastgivenyears}}{\text{NumberofYears}}\\ \text{}=\frac{5,00,000}{5}=\text{Rs1,00,000}\end{array}$
Page No 2.22:
Question 10:
Profits of a firm for the year ended 31st March for the last five years were:
Year ended  31st March, 2014  31st March, 2015  31st March, 2016  31st March, 2017  31st March, 2018 
Profit (₹)  20,000  24,000  30,000  25,000  18,000 
Answer:
Year 
Profit 
× 
Weight 
= 
Product 
2014 
20,000 
× 
1 
= 
20,000 
2015 
24,000 
× 
2 
= 
48,000 
2016 
30,000 
× 
3 
= 
90,000 
2017 
25,000 
× 
4 
= 
1,00,000 
2018 
18,000 
× 
5 
= 
90,000 
Total 


15 

3,48,000 






Page No 2.22:
Question 11:
A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2018, C is admitted to the partnership for 1/4th share of profits. For this purpose, goodwill is to be valued at two years' purchase of last three years' profits (after allowing partners' remuneration). Profits to be weighted 1 : 2 : 3, the greatest weight being given to last year. Net profit before partners' remuneration were: 2015–16: ₹ 2,00,000; 2016–17: ₹ 2,30,000; 2017 015018: ₹ 2,50,000. The remuneration of the partners is estimated to be ₹ 90,000 p.a. Calculate amount of goodwill.
Answer:
Year 
Profit before Partners’ Remuneration 
– 
Partners’ Remuneration 
= 
Profit after Partners’ Remuneration 
201516 
2,00,000 
– 
90,000 
= 
1,10,000 
201617 
2,30,000 
– 
90,000 
= 
1,40,000 
201718 
2,50,000 
– 
90,000 
= 
1,60,000 
Year 
Profit 
× 
Weight 
= 
Product 
201516 
1,10,000 
× 
1 
= 
1,10,000 
201617 
1,40,000 
× 
2 
= 
2,80,000 
201718 
1,60,000 
× 
3 
= 
4,80,000 

Total 

6 

8,70,000 






$\mathrm{Weighted}\mathrm{Average}\mathrm{Profit}=\frac{\mathrm{Total}\mathrm{Product}\mathrm{of}\mathrm{Profits}}{\mathrm{Total}\mathrm{of}\mathrm{Weights}}\phantom{\rule{0ex}{0ex}}\mathrm{or},\mathrm{Weighted}\mathrm{Average}\mathrm{Profit}=\frac{8,70,000}{6}=\mathrm{Rs}1,45,000$
Page No 2.22:
Question 12:
Manbir and Nimrat are partners and they admit Anahat into partnership. It was agreed to value goodwill at three tears' purchase on Weighted Average Profit Method taking profits of last five years. Weights assigned to each year as 1, 2, 3, 4 and 5 respectively to profit for the year ended 31st March, 2014 to 2108. The profit for these years were: ₹ 70,000, ₹ 1,40,000, ₹ 1,00,000, ₹ 1,60,000 and ₹ 1,65,000 respectively.
Scrutiny of books of account revealed following information:
(i) There was an abnormal loss of ₹ 20,000 in the year ended 31st March, 2014.
(ii) There was an abnormal gain (profit) of ₹ 30,000 in the year ended 31st March, 2015.
(iii) Closing Stock as on 31st March, 2017 was overvalued by ₹ 10,000.
Calculate the value of goodwill.
Answer:
$\begin{array}{l}\text{Goodwill}=\text{WeightedAverageProfit}\times \text{No.ofyears'Purchase}\\ \text{}=1,39,000\times 3=\text{Rs4,17,000}\end{array}$
Working Notes:
WN: 1 Calculation of Normal Profits:
Year 
Profit/(Loss) (Rs) 
Adjustment 
Normal Profit (Rs) 
31 March, 2014 
70,000 
20,000 
90,000 
31 March, 2015 
1,40,000 
(30,000) 
1,10,000 
31 March, 2016 
1,00,000 
 
1,00,000 
31 March, 2017 
1,60,000 
(10,000) 
1,50,000 
31 March, 2018 
1,65,000 
10,000 
1,75,000 
WN: 2 Calculations of Weighted Average Profits:
Year 
Normal Profit 
Weight 
Product 
31 March, 2014 
90,000 
1 
90,000 
31 March, 2015 
1,10,000 
2 
2,20,000 
31 March, 2016 
1,00,000 
3 
3,00,000 
31 March, 2017 
1,50,000 
4 
6,00,000 
31 March, 2018 
1,75,000 
5 
8,75,000 
Total 

15 
20,85,000 
$\begin{array}{l}\text{WeightedAverageProfit}=\frac{\text{TotalofProfitProduct}}{\text{Totalof\hspace{0.17em}Weights}}\\ \text{}=\frac{20,85,000}{15}=\text{Rs1,39,000}\end{array}$
Page No 2.22:
Question 13:
Calculate the goodwill of a firm on the basis of three years' purchase of the weighted average profit of the last four years. The appropriate weights to be used and profits are:
Year  201415  201516  201617  201718 
Profit (₹)  1,01,000  1,24,000  1,00,000  1,40,000 
Weight  1  2  3  4 
(i) On 1st December, 2016, a major repair was made in respect of the plant incurring ₹ 30,000 which was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.
(ii) The closing stock for the year 201516 was overvalued by ₹ 12,000.
(iii) To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.
(iv) In 201516, a machine having a book value of ₹ 10,000 was sold for ₹ 11,000 but the proceeds were wrongly credited to Profit and Loss Account. No effect has been given to rectify the same. Depreciation is charged on machine @ 10% p.a. on reducing balance method.
Answer:
Particulars 
201415 
201516 
201617 
201718 
Profits 
1,01,000 
1,24,000 
1,00,000 
1,40,000 
Repair Capitalised 


+30,000 

Depreciation 


(1,000) 
(2,900) 
Overvaluation of Closing Stock 

(12,000) 
12,000 

Management Cost 
(24,000) 
(24,000) 
(24,000) 
(24,000) 
Sale Proceeds Wrong Depreciation 

(10,000) 


Adjusted Profits 
77,000 
78,000 
1,17,900 
1,13,910 
Weights 
1 
2 
3 
4 
Product 
77,000 
1,56,0000 
3,53,700 
4,55,640 
Working Notes:
$\mathrm{Goodwill}=\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}\times \mathrm{Number}\mathrm{of}\mathrm{Years}\text{'}\mathrm{Purchase}\phantom{\rule{0ex}{0ex}}\begin{array}{c}\begin{array}{rcl}\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}& =& \frac{\mathrm{Total}\mathrm{of}\mathrm{Product}}{\mathrm{Total}\mathrm{of}\mathrm{Weights}}\\ & =& \frac{77,000+1,56,000+3,53,700+4,55,640}{10}=\mathrm{Rs}1,04,234\end{array}\end{array}\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=1,04,234\times 3=\mathrm{Rs}3,12,702$
Note 1: Depreciation on Rs 30,000 machinery is charged for only 4 months in the year 201617.
Note 2: Sale proceeds wrongly credited in 201516 have been deducted after adjusting for profit of Rs 1,000. No depreciation is charged, since date of sale is not given (assumed that the machinery is sold at the end of the year).
Page No 2.23:
Question 14:
Gupta and Bose had a firm in which they had invested ₹ 50,000. On an average, the profits were ₹ 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years' purchase of profits in excess of profits @ 15% on the money invested. Calculate the value goodwill.
Answer:
Number of years’ purchase = 4
Page No 2.23:
Question 15:
The total capital of the firm of Sakshi, Mehak and Megha is ₹ 1,00,000 and the market rate of interest is 15%. The net profits for the last 3 years were ₹ 30,000; ₹ 36,000 and ₹ 42,000. Goodwill is to be valued at 2 years' purchase of the last 3 years' super profits. Calculate the goodwill of the firm.
Answer:
$\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profit}\times \mathrm{Number}\mathrm{of}\mathrm{Years}\text{'}\mathrm{Purchase}\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profit}\mathrm{Normal}\mathrm{Profit}\phantom{\rule{0ex}{0ex}}\begin{array}{c}\begin{array}{rcl}\mathrm{Average}\mathrm{Profits}& =& \frac{\mathrm{Total}\mathrm{Profits}}{\mathrm{Number}\mathrm{of}\mathrm{Years}}\\ & =& \frac{30,000+36,000+42,000}{3}=\mathrm{Rs}36,000\end{array}\end{array}\phantom{\rule{0ex}{0ex}}\begin{array}{c}\begin{array}{rcl}\mathrm{Normal}\mathrm{Profits}& =& \mathrm{Capital}\mathrm{Employed}\times \mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}\\ & =& 1,00,000\times \frac{15}{100}=15,000\end{array}\end{array}\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=36,00015,000=21,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=21,000\times 2=\mathrm{Rs}42,000$
Page No 2.23:
Question 16:
Average net profit expected in future by XYZ firm is ₹ 36,000 per year. Average capital employed in the business by the firm is ₹ 2,00,000. The normal rate of return from capital invested in this class of business is 10%. Remuneration of the partners is estimated to be ₹ 6,000 p.a. Calculate the value of goodwill on the basis of two years' purchase of super profit.
Answer:
Number of years’ purchase = 2
Page No 2.23:
Question 17:
A partnership firm earned net profits during the last three years ended 31st March, as follows: 2017 − ₹ 17,000; 2018 − ₹ 20,000; 2019 − ₹ 23,000.
The capital investment in the firm throughout the abovementioned period has been ₹ 80,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the abovementioned three years.
Answer:
Number of years’ purchase = 2
Page No 2.23:
Question 18:
A partnership firm earned net profits during the past three years as follows:
Year ended  31st March, 2018  31st March, 2017  31st March, 2016 
Net Profit (₹)  2,30,000  2,00,000  1,70,000 
Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the abovementioned three years.
Answer:
Year 
Profit before Partners’ Remuneration 
– 
Partners’ Remuneration 
= 
Actual Profit after Remuneration 
2016 
1,70,000 
– 
1,00,000 
= 
70,000 
2017 
2,00,000 
– 
1,00,000 
= 
1,00,000 
2018 
2,30,000 
– 
1,00,000 
= 
1,30,000 
Number of years’ purchase = 2
Page No 2.23:
Question 19:
A business earned an average profit of ₹ 8,00,000 during the last few years. The normal rate of profit in the similar type of business is 10%. The total value of assets and liabilities of the business were ₹ 22,00,000 and ₹ 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at$\mathrm{}$ $2\raisebox{1ex}{$1$}\!\left/ \!\raisebox{1ex}{$2$}\right.$ years' purchase of super profits.
Answer:
Page No 2.23:
Question 20:
Capital of the firm of Sharma and Verma is ₹ 2,00,000 and the market rate of interest is 15%. Annual salary to partners is ₹ 12,000 each. The profits for the last three years were ₹ 60,000; ₹ 72,000 and ₹ 84,000. Goodwill is to be valued at 2 years' purchase of last 3 years' average super profit.
Calculate goodwill of the firm.
Answer:
Year  Profit before Partner’s Salary  –  Partner’s Salary  =  Actual Profit after Salary 
1  60,000  –  24,000  =  36,000 
2  72,000  –  24,000  =  48,000 
3  84,000  –  24,000  =  60,000 
Page No 2.24:
Question 21:
A and B are equal partners. They decide to admit C for 1/3rd share. For the purpose of admission of C, goodwill of the firm is to be valued at four years' purchase of super profit. Average capital employed in the firm is ₹ 1,50,000. Normal rate of return may be taken as 15% p.a. Average profit of the firm is ₹ 40,000. Calculate value of goodwill.
Answer:
Number of years’ purchase = 4
Page No 2.24:
Question 22:
On 1st April, 2018, an existing firm had assets of ₹ 75,000 including cash of ₹ 5,000. Its creditors amounted to ₹ 5,000 on that date. The firm had a Reserve of ₹ 10,000 while Partners' Capital Accounts showed a balance of ₹ 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at ₹ 24,000 at four years' purchase of super profit, find average profit per year of the existing firm.
Answer:
Capital Employed = Total Assets − Creditors
= 75,000 − 5,000 = Rs 70,000
Goodwill of the firm = Rs 24,000
Number of years’ purchase = 4
Or, 24,000 = Super Profit × 4
Page No 2.24:
Question 23:
The average profit earned by a firm is ₹ 1,00,000 which includes undervaluation of stock of ₹ 40,000 on an average basis. The capital invested in the business is ₹ 6,30,000 and the normal tare of return is 5%. Calculate goodwill of the firm on the basis of 5 time the super profit.
Answer:
Average Profit earned by a firm = Rs 1,00,000
Undervaluation of Stock = Rs 40,000
Average Actual Profit = Average Profit earned by a firm + Undervaluation of Stock
or, Average Actual Profit = 1,00,000 + 40,000 = Rs 1,40,000
Super Profit = Actual Average Profit – Normal Profit
or, Super Profit = 1,40,000 – 31,500 = Rs 1,08,500
Goodwill = Super Profit × Number of Times
Goodwill = 1,08,500 × 5 = Rs 5,42,500
Page No 2.24:
Question 24:
Average profit earned by a firm is ₹ 7,50,000 which includes overvaluation of stock of ₹ 30,000 on an average basis. The capital invested in the business is ₹ 42,00,000 and the normal tare of return is 15%. Calculate goodwill of the firm on the basis of 3 time the super profit.
Answer:
Average Profit earned by a firm = Rs 7,50,000
Overvaluation of Stock = Rs 30,000
Average Actual Profit = Average Profit earned by a firm – Overvaluation of Stock
or, Average Actual Profit = 7,50,000 – 30,000 = Rs 7,20,000
Super Profit = Actual Average Profit – Normal Profit
or, Super Profit = 7,20,000 – 6,30,000 = Rs 90,000
Goodwill = Super Profit × Number of Times
Goodwill = 90,000 × 3 = Rs 2,70,000
Page No 2.24:
Question 25:
Ayub and Amit are partners in a firm and they admit Jaspal into partnership w. e. f. 1st April, 2018. They agreed to value goodwill at 3 years' purchase of Super Profit Method for which they decided to average profit of last 5 years. The profit for the last 5 years were:
Year Ended  Net Profit (₹)  
31st March, 2014  1,50,000  
31st March, 2015  1,80,000  
31st March, 2016  1,00,000  ( Including abnormal loss of ₹ 1,00,000) 
31st March, 2017  2,60,000  (Including abnormal gain (profit) of ₹ 40,000) 
31st March, 2018  2,40,000 
Calculate value of goodwill.
Answer:
$\begin{array}{l}\text{Goodwill}=\text{SuperProfit}\times \text{No.ofYears'Purchase}\\ \text{}=\text{48,000}\times 3=\text{Rs1,44,000}\end{array}$
Working Notes:
WN: 1 Calculation of Normal Profits:
Year 
Profit/(Loss) (Rs) 
Adjustment 
Normal Profit (Rs) 
31 March, 2014 
1,50,000 
 
1,50,000 
31 March, 2015 
1,80,000 
 
1,80,000 
31 March, 2016 
1,00,000 
1,00,000 
2,00,000 
31 March, 2017 
2,60,000 
(40.000) 
2,20,000 
31 March, 2018 
2,40,000 
 
2,40,000 


Total Profit 
9,90,000 
WN2: Calculation of Super Profits
$\begin{array}{l}\text{AverageProfit}=\frac{\text{TotalProfitofpastgivenyears}}{\text{NumberofYears}}\\ \text{}=\frac{9,90,000}{5}=\text{Rs1,98,000}\\ \text{NormalProfit}=\text{CapitalEmployed}\times \frac{\text{NormalRateofReturn}}{100}\\ \text{}=\text{15,00,000}\times \frac{10}{100}=\text{Rs1,50,000}\\ \text{SuperProfit}=\text{AverageProfit}\text{NormalProfit}\\ \text{}=\text{1,98,000}\text{1,50,000}=\text{Rs48,000}\end{array}$
WN3: Calculation of Capital Employed
$\begin{array}{l}\text{CapitalEmployed}=\text{TotalAssets}\text{OutsideLiabilities}\\ \text{}=\text{20,00,000}\text{5,00,000}=\text{Rs15,00,000}\end{array}$
Page No 2.24:
Question 26:
From the following information, calculate value of goodwill of the firm by applying Capitalisation Method: Total Capital of the firm ₹ 16,00,000.
Normal rate of return 10%. Profit for the year ₹ 2,00,000.
Answer:
Total Capital = Rs 16,00,000
Page No 2.24:
Question 27:
A business has earned average profit of ₹ 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are ₹ 10,00,000 and its external liabilities are ₹ 1,80,000. The normal rate of return is 10%.
Answer:
$\mathrm{Goodwill}=\mathrm{Capitalised}\mathrm{Value}\mathrm{of}\mathrm{Average}\mathrm{Profits}\mathrm{Actual}\mathrm{Capital}\mathrm{Employed}\phantom{\rule{0ex}{0ex}}\begin{array}{c}\begin{array}{rcl}\mathrm{Capitalised}\mathrm{Value}\mathrm{of}\mathrm{Average}\mathrm{Profit}& =& \mathrm{Average}\mathrm{Profit}\times \frac{100}{\mathrm{Nominal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}\\ & =& 1,00,000\times \frac{100}{10}=10,00,000\end{array}\end{array}\phantom{\rule{0ex}{0ex}}\mathrm{Actual}\mathrm{Capital}\mathrm{Employed}=10,00,0001,80,000=8,20,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=10,00,0008,20,000=\mathrm{Rs}1,80,000$
Page No 2.24:
Question 28:
Form the following particulars, calculate value of goodwill of a firm by applying Capitalisation of Average Profit Method:
(i) Profits of last five consecutive years ending 31st March are: 2018–₹ 54,000; 2017–₹42,000; 2016–₹ 39,000; 2015–₹ 67,000 and 2014–₹ 59,000
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm ₹ 2,00,000.
Answer:
Page No 2.25:
Question 29:
A business has earned average profit of ₹ 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method, and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profits.
Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
Answer:
Average Profit – Rs 4,00,000
Normal Rate of Return – 10%
(i) Goodwill by Capitalisation of Super profit
Super Profit = Actual Profit – Normal Profit
= 4,00,000 – 3,28,000
= Rs 72,000
=Rs 7,20,000
(ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits
Therefore, Goodwill is valued at Rs 2,16,000
Page No 2.25:
Question 30:
A firm earns profit of ₹ 5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsiders' liabilities as on the date of goodwill are ₹ 55,00,000 and ₹ 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.
Answer:
(i) Calculation of Goodwill by Capitalisation of Super Profit Method
Profit of the firm = Rs 5,00,000
(ii) Calculation of Goodwill by Capitalisation of Average Profit Method
Page No 2.25:
Question 31:
Average profit of the firm is ₹ 2,00,000. Total assets of the firm are ₹ 15,00,000 whereas Partners' Capital is ₹ 12,00,000. If normal rate of return in a similar business is 10% of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?
Answer:
$\begin{array}{l}\text{Goodwill}=\text{SuperProfit}\times \frac{\text{100}}{\text{NormalRateofReturn}}\\ \text{}=\text{80,000}\times \frac{100}{10}=\text{Rs8,00,000}\end{array}$
Working Notes:
WN1: Calculation of Super Profits
$\begin{array}{l}\text{AverageProfit}=\frac{\text{TotalProfitforpastgivenyears}}{\text{NumberofYears}}\\ \text{}=\text{Rs2,00,000}\\ \text{NormalProfit}=\text{CapitalEmployed}\times \frac{\text{NormalRateofReturn}}{100}\\ \text{}=\text{12,00,000}\times \frac{10}{100}=\text{Rs1,20,000}\\ \text{SuperProfit}=\text{AverageProfit}\text{NormalProfit}\\ \text{}=2,00\text{,000}\text{1,20,000}=\text{Rs80,000}\end{array}$
WN2: Calculation of Capital Employed
$\begin{array}{l}\text{CapitalEmployed}=\text{TotalAssets}\text{OutsideLiabilities}\\ \text{}=15\text{,00,000}3\text{,00,000}=\text{Rs12,00,000}\end{array}$
Page No 2.25:
Question 32:
Rajan and Rajani are partners in a firm. Their capitals were Rajan ₹ 3,00,000; Rajani ₹ 2,00,000. During the year 201718, the firm earned a profit of ₹ 1,50,000. Calculate the value of goodwill of the firm by capitalisation of super profit assuming that the normal rate of return is 20%.
Answer:
$\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \frac{100}{\mathrm{Nominal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profit}\mathrm{Normal}\mathrm{Profit}\phantom{\rule{0ex}{0ex}}\mathrm{Average}\mathrm{Profit}=1,50,000\left(\mathrm{Given}\right)\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profit}=\mathrm{Capital}\mathrm{Employed}\times \mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profit}=(3,00,000+2,00,000)\times 20\%=1,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profit}=1,50,0001,00,000=50,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=50,000\times \frac{100}{20}=\mathrm{Rs}2,50,000$
Page No 2.25:
Question 33:
Average profit of GS & Co. is ₹ 50,000 per year. Average capital employed in the business is ₹ 3,00,000. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.
Answer:
(i) $\begin{array}{l}\text{Goodwill}=\text{SuperProfit}\times \text{No.ofYears'Purchase}\\ \text{}=20\text{,000}\times 3=\text{Rs60,000}\end{array}$
(ii) $\begin{array}{l}\text{Goodwill}=\text{SuperProfit}\times \frac{\text{100}}{\text{NormalRateofReturn}}\\ \text{}=2\text{0,000}\times \frac{100}{10}=\text{Rs2,00,000}\end{array}$
Working Notes:
WN1: Calculation of Super Profits
$\begin{array}{l}\text{AverageProfit}=\frac{\text{TotalProfitsforpastgivenyears}}{\text{No.ofYears}}\\ \text{}=\text{Rs50,000}\\ \text{NormalProfit}=\text{CapitalEmployed}\times \frac{\text{NormalRateofReturn}}{100}\\ \text{}=3\text{,00,000}\times \frac{10}{100}=\text{Rs30,000}\\ \text{SuperProfit}=\text{AverageProfit}\text{NormalProfit}\\ \text{}=50\text{,000}3\text{0,000}=\text{Rs20,000}\end{array}$
Page No 2.25:
Question 34:
From the following information, calculate value of goodwill of the firm:
(i) At three years' purchase of Average Profit.
(ii) At three years' purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average profit.
Information:
(a) Average Capital Employed is ₹ 6,00,000.
(b) Net Profit/(Loss) of the firm for the last three years ended are:
31st March, 2018 − ₹ 2,00,000, 31st March, 2017 − ₹ 1,80,000, and 31st March, 2016 − ₹ 1,60,000.
(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of ₹ 1,00,000 to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and nontrade investments) is ₹ 7,00,000 whereas Partners' Capital is ₹ 6,00,000 and Outside Liabilities ₹ 1,00,000.
Answer:
$\begin{array}{l}\text{(i)Goodwill}=\text{AverageProfit}\times \text{No.ofyears'purchase}\\ \text{}=8\text{0,000}\times 3=\text{Rs2,40,000}\end{array}$
$\begin{array}{l}\text{(ii)Goodwill}=\text{SuperProfit}\times \text{No.ofyears'purchase}\\ \text{}=2\text{0,000}\times 3=\text{Rs60,000}\end{array}$
$\begin{array}{l}\text{(iii)Goodwill}=\text{SuperProfit}\times \frac{\text{100}}{\text{NormalRateofReturn}}\\ \text{}=2\text{0,000}\times \frac{100}{10}=\text{Rs2,00,000}\end{array}$
$\begin{array}{l}\text{(iv)Goodwill}=\text{CapitalisedValue}\text{NetAssets}\\ \text{}=8\text{,00,000}6\text{,00,000}=\text{Rs2,00,000}\end{array}$
Working Notes:
WN1: Calculation of Average and Super Profits
$\begin{array}{l}\text{AverageProfit}=\frac{\text{TotalProfitsofpastyearsgiven}}{\text{No.ofYears}}=\frac{2,00,000+1,80,000+1,60,000}{3}\\ \text{}=\text{Rs1,80,000,}\\ \text{AverageProfit(Adjusted)=Rs1,80,0001,00,000(Remunerationtopartners)}\\ \text{=Rs80,000}\\ \text{NormalProfit}=\text{CapitalEmployed}\times \frac{\text{NormalRateofReturn}}{100}\\ \text{}=6\text{,00,000}\times \frac{10}{100}=\text{Rs60,000}\\ \text{SuperProfit}=\text{AverageProfit(Adjusted)}\text{NormalProfit}\\ \text{}=80\text{,000}6\text{0,000}=\text{Rs20,000}\end{array}$
WN2: Calculation of Capital Employed
$\begin{array}{l}\text{CapitalEmployed}=\text{TotalAssets}\text{OutsideLiabilities}\\ \text{}=7\text{,00,000}1\text{,00,000}=\text{Rs6,00,000}\end{array}$
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