NCERT Solutions for Class 12 Commerce Accountancy Chapter 3 - Goodwill: Nature And Valuation
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Page No 3.28:

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 − â‚¹ 12,000; 2017 − â‚¹ 18,000; 2018 − â‚¹ 16,000; 2019 − â‚¹ 14,000.
Calculate amount of Goodwill.

Answer:

Number of years’ purchase = 3

Page No 3.28:

Question 2:

Profits for the five years ending on 31st March, are as follows:
Year 2015 − â‚¹ 4,00,000; Year 2016 − â‚¹ 3,98,000; Year 2017 − â‚¹ 4,50,000; Year 2018 − â‚¹ 4,45,000 and Year 2019 − â‚¹ 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.

Answer:

$Goodwill = Average Profits \times Number of Years' Purchase \begin{matrix} \begin{array}{rcl} Average Profits & = & \frac{Total Profits}{Number of Years} \\ = & \frac{4, 00, 000 + 3, 98, 000 + 4, 50, 000 + 4, 45, 000 + 5, 00, 000}{5} \\ = & \frac{21, 93, 000}{5} = Rs 4, 38, 600 \end{array} \end{matrix} Goodwill = 4, 38, 600 \times 4 = Rs 17, 54, 400$

Page No 3.28:

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	2018-19	2017-18	2016-17	2015-16	2014-15
Profits (â‚¹)	8,00,000	15,00,000	18,00,000	4,00,000 (Loss)	13,00,000

Answer:

Number of years’ purchase = 3

Page No 3.28:

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 â‚¹ 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:

$\begin{array}{l} Goodwill = Average Profit \times No. of years' purchase \\ = 2,00,000 \times 1.5 = Rs 3,00,000 \end{array}$

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

$\begin{array}{l} Average Profit = \frac{Total Profits for past given years}{Number of Years} \\ = \frac{6, 00, 000}{3} = Rs 2,00,000 \end{array}$

Page No 3.28:

Question 5:

Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take Parv into partnership for 1/4th share on 1st April, 2019. 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	2014-15	2015-16	2016-17	2017-18	2018-19
Profits (â‚¹)	14,000	15,500	10,000	16,000	15,000

Calculate the value of goodwill.

Answer:

Calculation of Average Profit for Five Years

Year	Profit
2014 – 15	14,000
2015 – 16	15,500
2016 – 17	10,000
2017 – 18	16,000
2018 – 19	15,000
Total Profit	70,500

Calculation of Average Profit for Four Years

Year	Profit
2015 – 16	15,500
2016 – 17	10,000
2017 – 18	16,000
2018 – 19	15,000
Total Profit	56,500

Average Profit of four years is taken to compute the value of goodwill of the firm. This is because Average Profit of four years is more than the Average Profit of five years.

Page No 3.29:

Question 6:

Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2019 for 1/5th share in the future profits. For this purpose, goodwill is to be valued at 100% of the average annual profits of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were:

Year Ended	Profit (â‚¹)
31st March, 2019	2,88,000;
31st March, 2018	1,81,800;
31st March, 2017	1,87,200;
31st March, 2016	2,53,200.

Calculate the value of goodwill.â€‹

Answer:

Average Profits of Previous three years= $\frac{2, 88, 000 + 1, 81, 8000 + 1, 87, 200}{3} = ₹ 2, 19, 000$
Average Profits of Previous four years= $\frac{2, 88, 000 + 1, 81, 800 + 1, 87, 200 + 2, 53, 200}{4} = ₹ 2, 27, 550$
Since, the average profits of previous four years is greater than the average profits of previous three years.
Hence, Goodwill = 100% of Average Profits of Previous four years = â‚¹2,27,550

Page No 3.29:

Question 7:

Divya purchased Jyoti's business with effect from 1st April, 2019. Profits shown by Jyoti's business for the last three â€‹financial years were:

2016-17	:	â‚¹ 1,00,000 (including an abnormal gain of â‚¹ 12,500).
2017-18	:	â‚¹ 1,25,000 (after charging an abnormal loss of â‚¹ 25,000).
2018-19	:	â‚¹ 1,12,500 (excluding â‚¹ 12,500 as insurance premium on firm's property- now to be insured).

Calculate the value of firm's goodwill on the basis of two year's purchase of the average profit of the last three years.

Answer:

Normal Profit for the year 2016-17= (Total Profit - Abnormal Gain)= â‚¹ $(1, 00, 000 - 12, 500) = ₹ 87, 500$
Normal Profit for the year 2017-18= (Total Profit + Abnormal Loss)= $₹ (1, 25, 000 + 25, 000) = ₹ 1, 50, 000$
Normal Profit for the year 2018-19= (Total Profit - Indirect Expenses)= $₹ (1, 12, 500 - 12, 500) = ₹ 1, 00, 000$
$Average Profits = \frac{(Normal Profits for 2016 - 17) + (Normal Profits for 2017 - 18) + (Normal Profits for 2018 - 19)}{3}$
$Average Profits = \frac{87, 500 + 1, 50, 000 + 1, 00, 000}{3} = ₹ 1, 12, 500$
$Goodwill = Average Profits of last three years \times No . of years of Purchase Goodwill = ₹ (1, 12, 500 \times 2) = ₹ 2, 25, 000$

Page No 3.29:

Question 8:

Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years' purchase of average profit of last five years. These profits for the year ended 31st March, were:

Year	2015	2016	2017	2018	2019
Profit/(Loss) (â‚¹)	1,50,000	3,50,000	5,00,000	7,10,000	(5,90,000)

On 1st April, 2018, a car costing â‚¹ 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. Interest of â‚¹ 10,000 on Non-trade Investments is credit to income for the year ended 31st March, 2018 and 2019.
Calculate the value of goodwill after adjusting the above.

Answer:

Normal Profits for the year ended 31st March, 2018: $= (Total Profits + Purchase of car wrongly debited - Depreciation on Car - Income from Non - trade Investments) = ₹ (7, 10, 000 + 1, 00, 000 - 25, 000 - 10, 000) = ₹ 7, 75, 000$
Normal Profits for the year ended 31st March, 2019:
$= (Total Loss + Income from Non - Trade Investments) = ₹ (5, 90, 000 + 10, 000) = ₹ 6, 00, 000$
$Average Profits = \frac{Normal Profits from 31 st March, 2015 to 31 st March, 2019}{5}$
$Average Profits = ₹ (\frac{1, 50, 000 + 3, 50, 000 + 5, 00, 000 + 7, 75, 000 + 6, 00, 000}{5}) = ₹ 2, 35, 000$
$Goodwill = Average Profits for last 5 years \times No . of years of purchase$ $= ₹ (2, 35, 000 \times 4) = ₹ 9, 40, 000$

Page No 3.29:

Question 9:

Bharat and Bhushan are partners sharing profits in the ratio of 3 : 2. They decided to admit Manu as a partner from 1st April, 2019 on the following terms:
(i) Manu will be given 2/5th share of the profit.
(ii) Goodwill of the firm will 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:
2019 - Profit â‚¹ 30,000 (after debiting loss of stock by fire â‚¹ 40,000).
2018 - Loss â‚¹ 80,000 (includes voluntary retirement compensation paid â‚¹ 1,10,000).
2017 - Profit â‚¹ 1,10,000 (including a gain (profit) of â‚¹ 30,000 on the sale of fixed assets).
â€‹Calculate the value of goodwill.

Answer:

Normal Profits for the year ended 31st March,2019= $(Total Profits + Loss by fire) = ₹ (30, 000 + 40, 000) = ₹ 70, 000$
Normal Profits for the year ended 31st March,2018= $(Total loss - Voluntary retirement Compensation paid) = ₹ (80, 000 - 1, 10, 000)$ = â‚¹30,000
Normal Profits for the year ended 31st March,2017= $₹ (Total Profit - Gain on sale of Fixed Assets) = ₹ (1, 10, 000 - 30, 000)$ = â‚¹80,000
$Average Profits = (\frac{Normal Profits from 31 st March, 2017 to 31 st March, 2019}{3}) = (\frac{70, 000 + 30, 000 + 80, 000}{3}) = ₹ 60, 000$
$Goodwill = Average Profits for last 3 years \times No . of years of purchase = ₹ (60, 000 \times 2) = ₹ 1, 20, 000$

Page No 3.29:

Question 10:

Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3 : 2. They admit Kanika into partnership for 1/4th share in profit. Kanika brings in her 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:
2017 - Profit â‚¹ 50,000 (including profit on sale of assets â‚¹ 5,000).
2018 - Loss â‚¹ 20,000 (including loss by fire â‚¹ 30,000).
2019 - Profit â‚¹ 70,000 (including insurance claim received â‚¹ 18,000 and interest on investments and Dividend received â‚¹ 8,000).
â€‹Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.

Answer:

$Normal Profits for the year ended 31 st March, 2017 = (Total Profits - Profit on Sale of Assets) = ₹ (50, 000 - 5, 000) = ₹ 45, 000$
$Normal Profits for the year ended 31 st March, 2018 = (Loss by fire - Total Loss) = ₹ (20, 000 - 30, 000) = ₹ 10, 000$
$Normal Profit for the year ended 31 st March, 2019 = (Total Profit - Insurnace Claim Received - Interest on Invetsment - Dividend Received) = ₹ (70, 000 - 18, 000 - 8, 000) = ₹ 44, 000$
$Average Profits = ₹ (\frac{Normal Profits from the year ended 31 st March, 2017 to 31 st March, 2019}{3}) = ₹ (\frac{45, 000 + 10, 000 + 44, 000}{3}) = ₹ 33, 000$
$Goodwill = Average Profits for the last three years \times No . of years of Purchase = ₹ (33, 000 \times 2) = ₹ 66, 000$
$Kanika' s Share of Goodwill = ₹ (66, 000 \times \frac{1}{4}) = ₹ 16, 500$

Page No 3.30:

Question 11:

Sumit purchased Amit's business on 1st April, 2019. 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, 2016	31st March, 2017	31st March, 2018	31st March, 2019
Profits (â‚¹)	80,000	1,45,000	1,60,000	2,00,000

Books of Account revealed that:
(i) Abnormal loss of â‚¹ 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2016.
(ii) A fixed asset was sold in the year ended 31st March, 2017 and gain (profit) of â‚¹ 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2018 assets of the firm were not insured due to oversight. Insurance premium not paid was â‚¹ 15,000.
Calculate the value of goodwill.

Answer:

$\begin{array}{l} Goodwill = Average Profit \times No. of years' purchase \\ = 1, 41, 250 \times 2 = ₹ 2,82,500 \end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits

Year	Profit/(Loss) (â‚¹)	Adjustment	Normal Profit (â‚¹)
31 March, 2016	80,000	20,000	1,00,000
31 March, 2017	1,45,000	(25,000)	1,20,000
31 March, 2018	1,60,000	(15,000)	1,45,000
31 March, 2019	2,00,000	-	2,00,000
			5,65,000

WN: 2 Calculation of Average Profit

$\begin{array}{l} Average Profit = \frac{Total Profit for past given years}{Number of Years} \\ = \frac{5, 65, 000}{4} = ₹ 1,41,250 \end{array}$

Page No 3.30:

Question 12:

Geet and Meet are partners in a firm. They admit Jeet 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:â€‹

Year Ended	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018	31st March, 2019
Profits (â‚¹)	90,000 (Loss)	1,60,000	1,50,000	65,000	1,77,000

Books of Account of the firm revealed that:
(i) The firm had gain (profit) of â‚¹ 50,000 from sale of machinery sold in the year ended 31st March, 2016. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of â€‹â‚¹ 20,000 incurred in the year ended 31st March, 2017 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2017 amounting to â‚¹ 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:

Particulars	Year	31^stMar., 2015	31^st Mar., 2016	31^st Mar., 2017	31^st Mar., 2018	31^st Mar., 2019
Profit/Loss		(90,000)	1,60,000	1,50,000	65,000	1,77,000
Less: Gain on Sale of Machinery			50,000
Add: Abnormal Loss				20,000
Add: Overhaul of existing machinery
Debited to Repairs A/c					1,00,000
Less: Depreciation @20% p.a.					15,000	17,000
Normal Profit/Loss		(90,000)	1,10,000	1,70,000	1,50,000	1,60,000

$Average Profits = (\frac{Normal profits from the year ended 31 st March, 2015 to 31 st March, 2019}{5}) = ₹ (\frac{- 90, 000 + 1, 10, 000 + 1, 70, 000 + 1, 50, 000 + 1, 60, 000}{5}) = ₹ 1, 00, 000 Goodwill = Average profits of the last 5 years \times No . of years of Purchase = ₹ (1, 00, 000 \times 3) = ₹ 3, 00, 000$

Page No 3.30:

Question 13:

Profits of a firm for the year ended 31st March for the last five years were:

Year Ended	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018	31st March, 2019
Profits (â‚¹)	20,000	24,000	30,000	25,000	18,000

Calculate value of goodwill on the basis of three years' purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2015, 2016, 2017, 2018 and 2019.

Answer:

Year	Profit	×	Weight	=	Product
2015	20,000	×	1	=	20,000
2016	24,000	×	2	=	48,000
2017	30,000	×	3	=	90,000
2018	25,000	×	4	=	1,00,000
2019	18,000	×	5	=	90,000
Total			15		3,48,000

Page No 3.30:

Question 14:

A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2019, 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: 2016-17 : â‚¹ 2,00,000; 2017-18 : â‚¹ 2,30,000; 2018-19 : â‚¹ 2,50,000. The remuneration of the partners is estimated to be â‚¹ 90,000 p.a. Calculate amount of goodwill.

Answer:

Year	Profit before Partners’ Remuneration	–	Partners’ Remuneration	=	Profit after Partners’ Remuneration
2016-17	2,00,000	–	90,000	=	1,10,000
2017-18	2,30,000	–	90,000	=	1,40,000
2018-19	2,50,000	–	90,000	=	1,60,000

Year	Profit	×	Weight	=	Product
2016-17	1,10,000	×	1	=	1,10,000
2017-18	1,40,000	×	2	=	2,80,000
2018-19	1,60,000	×	3	=	4,80,000
	Total		6		8,70,000

$Weighted Average Profit = \frac{Total Product of Profits}{Total of Weights} or, Weighted Average Profit = \frac{8, 70, 000}{6} = ₹ 1, 45, 000$

Page No 3.30:

Question 15:

Raman and Daman are partners sharing profits in the ratio of 60 : 40 and for the last four years they have been getting annual salaries of â‚¹ 50,000 and â‚¹ 40,000 respectively. The annual accounts have shown the following net profit before charging partners' salaries:
Year ended 31st March, 2017 − â‚¹ 1,40,000; 2018 − â‚¹ 1,01,000 and â€‹2019 − â‚¹ 1,30,000.
â€‹On 1st April, 2019, Zeenu is admitted to the partnership for 1/4th share in profit (without any salary). Goodwill is to be valued at four years' purchase of weighted average profit of last three years (after partners' salaries); Profits to be weighted as 1 : 2 : 3, the greatest weight being given to the last year. Calculate the value of Goodwill.

Answer:

Year	Profits before charging Salary (â‚¹)	Profits after charging Salary (â‚¹)	Weights	Weighted Profits (â‚¹)
31^st March, 2017	1,40,000	1,40,000- 90,000= 50,000	1	50,000
31^st March, 2018	1,01,000	1,01,000- 90,000= 11,000	2	22,000
31^st March, 2019	1,30,000	1,30,000- 90,000= 40,000	3	1,20,000
Total			6	1,92,000

$Weighted Average Profits = (\frac{Total of Weighted Profits}{Total Weights}) = ₹ (\frac{1, 92, 000}{6}) = ₹ 32, 000 Goodwill = Weighted Average Profits \times No . of years of Purchase = ₹ (32, 000 \times 4) = ₹ 1, 28, 000$ â€‹

Page No 3.31:

Question 16:

Calculate goodwill of a firm on the basis of three years' purchase of the Weighted Average Profit of the last four years. The profits of the last four financial years ended 31st March, were: 2016 − â‚¹ 25,000; 2017 − â‚¹ 27,000; 2018 − â‚¹ 46,900 and 2019 − â‚¹ 53,810. The weights assigned to each year are: 2016 − 1; 2017 − 2; 2018 − 3; 2019 − 4. You are supplied the following information:
(i) On 1st April, 2016, a major plant repair was undertaken for â‚¹ 10,000 which was charged to revenue. The said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% on Reducing Balance Method.
(ii) The Closing Stock for the years ended 31st March, 2017 and 2018 were overvalued by â‚¹ 1,000 and â‚¹ 2,000 respectively.
(iii) To cover management cost an annual charge of â€‹â‚¹ 5,000 should be made for the purpose of goodwill valuation.

Answer:

Particulars	Year	31^stMar., 2016	31^st Mar., 2017	31^st Mar., 2018	31^st Mar., 2019
Profit		25,000	27,000	46,900	53,810
Add: Repairs to Plant Capitalised			10,000
Less: Depreciation @10% W.D.V			1,000	900	810
Less: Overvaluation of Closing Stock			1,000	2,000
Add: Overvaluation of Opening Stock				1,000	2,000
Less: Annual Charge		5,000	5,000	5,000	5,000
Normal Profit/Loss		20,000	30,000	40,000	50,000

â€‹

Year	Normal Profits (â‚¹)	Weights	Weighted Profits (â‚¹)
31^st March, 2016	20,000	1	20,000
31^st March, 2017	30,000	2	60,000
31^st March, 2018	40,000	3	1,20,000
31^st March, 2019	50,000	4	2,00,000
Total		10	4,00,000

$Weighted Average Profits = (\frac{Total of Weighted Profits}{Total Weights}) = ₹ (\frac{4, 00, 000}{10}) = ₹ 40, 000 Goodwill = Weighted Average Profits \times No . of years of Purchase = ₹ (40, 000 \times 3) = ₹ 1, 20, 000$

Page No 3.31:

Question 17:

Dinesh and Mahesh are partners sharing profits and losses in the ratio of 3 : 2. They admit Ramesh into partnership for 1/4th share in profits. Ramesh brings in his share of goodwill in cash. Goodwill for this purpose shall be calculated at two years' purchase of the weighted average normal profit of past three years. Weights being assigned to each year 2017−1; 2018−2 and 2019−3. Profits of the last three years were:
2017 − Profit â‚¹ 50,000 (including profits on sale of assets â‚¹ 5,000).
2018 − Loss â‚¹ 20,000 (including loss by fire â‚¹ 35,000).
2019 − Profit â‚¹ 70,000 (including insurance claim received â‚¹ 18,000 and interest on investments and dividend received â‚¹ 8,000).
â€‹Calculate the value of goodwill. Also, calculate the goodwill brought in by Ramesh.

Answer:

Normal Profits for the year 2017 $= (Total Profits - Profit on Sale of Assets) = ₹ (50, 000 - 5, 000) = ₹ 45, 000$
Normal Profits for the year 2018 $= (Loss by Fire - Total Loss) = ₹ (35, 000 - 20, 000) = ₹ 15, 000$
Normal Profits for the year 2019 $= (Total Profit - Insurance Claim Received - Dividend Received) = ₹ (70, 000 - 18, 000 - 8, 000) = ₹ 44, 000$
â€‹

Year	Normal Profits (â‚¹)	Weights	Weighted Profits (â‚¹)
2017	45,000	1	45,000
2018	15,000	2	30,000
2019	44,000	3	1,32,000
Total		6	2,07,000

$Weighted Average Profits = (\frac{Total of Weighted Profits}{Toatal of Weights}) = ₹ (\frac{2, 07, 000}{6}) = ₹ 34, 500 Goodwill = Weighted Average Profits \times No . of years of Purchase = ₹ (34, 500 \times 2) = ₹ 69, 000 Ramesh' s Share of Goodwill = ₹ (69, 000 \times \frac{1}{4}) = ₹ 17, 250$

Page No 3.31:

Question 18:

Manbir and Nimrat are partners and they admit Anahat into partnership. It was agreed to value goodwill at three years' 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 profits for the year ended 31st March, 2015 to 2019. The profits for these years were: â‚¹ 70,000, â‚¹ 1,40,000, â‚¹ 1,00,000, â‚¹ 1,60,000 and â‚¹ 1,65,000 respectively.
Scrutiny of books of account revealed following information:
(i) There was an abnormal loss of â‚¹ 20,000 in the year ended 31st March, 2015.
(ii) There was an abnormal gain (profit) of â‚¹ 30,000 in the year ended 31st March, 2016.
(iii) Closing Stock as on 31st March, 2018 was overvalued by â‚¹ 10,000.
Calculate the value of goodwill.

Answer:

$\begin{array}{l} Goodwill = Weighted Average Profit \times No. of years' Purchase \\ = 1, 39, 000 \times 3 = ₹ 4,17,000 \end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits:

Year	Profit/(Loss) (â‚¹)	Adjustment	Normal Profit (â‚¹)
31 March, 2015	70,000	20,000	90,000
31 March, 2016	1,40,000	(30,000)	1,10,000
31 March, 2017	1,00,000	-	1,00,000
31 March, 2018	1,60,000	(10,000)	1,50,000
31 March, 2019	1,65,000	10,000	1,75,000

WN: 2 Calculations of Weighted Average Profits:

Year	Normal Profit	Weight	Product
31 March, 2015	90,000	1	90,000
31 March, 2016	1,10,000	2	2,20,000
31 March, 2017	1,00,000	3	3,00,000
31 March, 2018	1,50,000	4	6,00,000
31 March, 2019	1,75,000	5	8,75,000
Total		15	20,85,000

$\begin{array}{l} Weighted Average Profit = \frac{Total of Profit Product}{Total of Weights} \\ = \frac{20, 85, 000}{15} = ₹ 1,39,000 \end{array}$

Page No 3.31:

Question 19:

Mahesh and Suresh are partners and they admit Naresh into partnership. They agreed to value goodwill at three years' purchase on Weighted Average Profit Method taking profits for the last five years. They assigned weights from 1 to 5 beginning from the earliest year and onwards. The profits for the last five years were as follows:

Year Ended	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018	31st March, 2019
Profits (â‚¹)	1,25,000	1,40,000	1,20,000	55,000	2,57,000

Scrutiny of books of account revealed the following:â€‹
(i) A second-hand machine was purchased for â€‹â‚¹ 5,00,000 on 1st July, 2017 and â‚¹ 1,00,000 were spent to make it operational. â‚¹ 1,00,000 were wrongly debited to Repairs Account. Machinery is depreciated @ 20% p.a. on Written Down Value Method.
(ii) Closing Stock as on 31st March, 2018 was undervalued by â‚¹ 50,000.
(iii) Remuneration to partners was to be considered as charge against profit and remuneration of â‚¹ 20,000 p.a. for each partner was considered appropriate.
Calculate the value of goodwill.

Answer:

Particulars	Year	31^stMar., 2015(â‚¹)	31^st Mar., 2016(â‚¹)	31^st Mar., 2017(â‚¹)	31^st Mar., 2018(â‚¹)	31^st Mar., 2019(â‚¹)
Profit		1,25,000	1,40,000	1,20,000	55,000	2,57,000
Add: Repairs on new machine wrongly					1,00,000
debited
Less: Depreciation on Machine (20% p.a.)					15,000	17,000
Add: Undervaluation of Closing Stock					50,000
Less: Undervaluation of Opening Stock						50,000
Less: Remuneration to Partners		40,000	40,000	40,000	40,000	40,000
Normal Profit/Loss		85,000	1,00,000	80,000	1,50,000	1,50,000

Year	Normal Profits (â‚¹)	Weights	Weighted Profits (â‚¹)
31^stMar., 2015	85,000	1	85,000
31^stMar., 2016	1,00,000	2	2,00,000
31^stMar., 2017	80,000	3	2,40,000
31^stMar., 2018	1,50,000	4	6,00,000
31^stMar., 2019	1,50,000	5	7,50,000
Total		15	18,75,000

$Weighted Average Profits = (\frac{Total of Weighted Profits}{Total of Weights}) = ₹ (\frac{18, 75, 000}{15}) = ₹ 1, 25, 000 Goodwill = Weightes Average Profits \times No . of years of purchase = ₹ (1, 25, 000 \times 3) = ₹ 3, 75, 000$

Page No 3.32:

Question 20:

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	2015-16	2016-17	2017-18	2018-19
Profits (â‚¹)	1,01,000	1,24,000	1,00,000	1,40,000
Weights	1	2	3	4

On a scrutiny of the accounts, the following matters are revealed:
(i) On 1st December, 2017, a major repair was made in respect of the plant incurring â‚¹ 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 2016-17 was overvalued by â‚¹ 12,000.
(iii) To cover management cost, an annual charge of â‚¹ 24,000 should be made for the purpose of goodwill valuation.
(iv) On 1st April, 2016, a machine having a book value of â‚¹ 10,000 was sold for â‚¹ 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	2015-16	2016-17	2017-18	2018-19
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)	900	810
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:

$Goodwill equals Weighted space Average space Profits cross times Number space of space Years apostrophe space Purchase table row cell table attributes columnalign right center left columnspacing 0px end attributes row cell Weighted space Average space Profits end cell equals cell fraction numerator Total space of space Product over denominator Total space of space Weights end fraction end cell row blank equals cell fraction numerator 77 comma 000 plus 1 comma 56 comma 000 plus 3 comma 53 comma 700 plus 4 comma 55 comma 640 over denominator 10 end fraction equals â‚¹ space 1 comma 04 comma 234 end cell end table end cell end table Goodwill equals 1 comma 04 comma 234 cross times 3 equals â‚¹ space 3 comma 12 comma 702$

Note 1: Depreciation on â‚¹ 30,000 machinery is charged for only 4 months in the year 2016-17.

Note 2: Sale proceeds wrongly credited in 2015-16 have been deducted after adjusting for profit of â‚¹ 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 3.32:

Question 21:

Average profit earned by a firm is â‚¹ 80,000 which includes undervaluation of stock of â‚¹ 8,000 on an average basis. The capital invested in the business is â€‹â‚¹ 8,00,000 and the normal rate of return is 8%. Calculate goodwill of the firm on the basis of 7 times the super profit.

Answer:

$Average Normal Profits of the firm = (Average Profits + Undervaluation of Stock) = ₹ (80, 000 + 8, 000) = ₹ 88, 000 Normal Profits = ₹ (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (8, 00, 000 \times \frac{8}{100}) = ₹ 64, 000 Super Profits = Average Profits - Normal Profits = ₹ (88, 000 - 64, 000) = ₹ 24, 000 Goodwill = Super Profits \times No . of years of Purchase = ₹ (24, 000 \times 7) = ₹ 1, 68, 000$

Page No 3.32:

Question 22:

Gupta and Bose had a firm in which they had invested â‚¹ 50,000. On an average, the profits were â‚¹ 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 3.32:

Question 23:

The total capital of the firm of Sakshi, Mehak and Megha is â‚¹ 1,00,000 and the market rate of interest is 15%. The net profits for the last 3 years were â‚¹ 30,000; â‚¹ 36,000 and â‚¹ 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:

$Goodwill = Super Profit \times Number of Years' Purchase Super Profits = Average Profit - Normal Profit \begin{matrix} \begin{array}{rcl} Average Profits & = & \frac{Total Profits}{Number of Years} \\ = & \frac{30, 000 + 36, 000 + 42, 000}{3} = Rs 36, 000 \end{array} \end{matrix} \begin{matrix} \begin{array}{rcl} Normal Profits & = & Capital Employed \times Normal Rate of Return \\ = & 1, 00, 000 \times \frac{15}{100} = 15, 000 \end{array} \end{matrix} Super Profits = 36, 000 - 15, 000 = 21, 000 Goodwill = 21, 000 \times 2 = Rs 42, 000$

Page No 3.32:

Question 24:

Rakesh and Ashok earned a profit of â‚¹ 5,000. They employed capital of â€‹â‚¹ 25,000 in the firm. It is expected that the normal rate of return is 15% of the capital. Calculate amount of goodwill if goodwill is valued at three years' purchase of super profit.

Answer:

$Actual Profits of the firm = ₹ 5, 000 Normal Profits = (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (25, 000 \times \frac{15}{100}) = ₹ 3, 750 Super Profits = Actual Profits - Normal Profits = ₹ (5, 000 - 3, 750) = ₹ 1, 250 Goodwill = Super Profits \times No . of years of Purchase = ₹ (1, 250 \times 3) = ₹ 3, 750$

Page No 3.32:

Question 25:

Average net profit expected in future by XYZ firm is â‚¹ 36,000 per year. Average capital employed in the business by the firm is â‚¹ 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 â‚¹ 6,000 p.a. Calculate the value of goodwill on the basis of two years' purchase of super profit.

Answer:

â€‹

Number of years’ purchase = 2

Page No 3.32:

Question 26:

A partnership firm earned net profits during the last three years ended 31st March, as follows: 2017 − â‚¹ 17,000; 2018 − â‚¹ 20,000; 2019 − â‚¹ 23,000.
The capital investment in the firm throughout the above-mentioned period has been â‚¹ 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 above-mentioned three years.

Answer:

Number of years’ purchase = 2

Page No 3.32:

Question 27:

A partnership firm earned net profits during the past three years as follows:

Year ended	31st March, 2019	31st March, 2018	31st March, 2017
Net Profit (â‚¹)	2,30,000	2,00,000	1,70,000

Capital investment in the firm throughout the above-mentioned period has been â‚¹ 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of the partners during this period is estimated to be â‚¹ 1,00,000 p.a.
Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the above-mentioned three years.

Answer:

Year	Profit before Partners’ Remuneration	–	Partners’ Remuneration	=	Actual Profit after Remuneration
2017	1,70,000	–	1,00,000	=	70,000
2018	2,00,000	–	1,00,000	=	1,00,000
2019	2,30,000	–	1,00,000	=	1,30,000

Number of years’ purchase = 2

Page No 3.33:

Question 28:

Ideal Marketing earned an average profit of â‚¹ 4,00,000 during the last five years. Normal rate of return on capital employed is 10%. Balance Sheet of the firm as at 31st March, 2019 was as follows:


Liabilities		Amount (â‚¹)	Assets	Amount â€‹(â‚¹)
Capital A/cs:			Land and Building	10,00,000
Shyam	5,00,000		Furniture	2,00,000
Sunder	5,00,000	10,00,000	Investments	1,00,000
Current A/cs:			Sundry Debtors	5,00,000
Shyam	2,00,000		Bills Receivable	50,000
Sunder	2,00,000	4,00,000	Closing Stock	3,00,000
Reserves		3,40,000	Cash in Hand	50,000
Sundry Creditors		4,00,000	Cash at Bank	1,00,000
Bills Payable		1,00,000
Outstanding Expenses		60,000
		23,00,000	â€‹	23,00,000

â€‹Calculate the value of goodwill, if it is valued at three years' purchase of Super Profits.

Answer:

$Average Profits = ₹ 4, 00, 000 Capital Employed = Total Assets - Non - Trade Investments - Outside Liabilities = ₹ (23, 00, 000 - 1, 00, 000 - 5, 60, 000) = ₹ 16, 40, 000 Normal Profits = (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (16, 40, 000 \times \frac{10}{100}) = ₹ 1, 64, 000 Super Profits = Average Profits - Normal Profits = ₹ (4, 00, 000 - 1, 64, 000) = ₹ 2, 36, 000 Goodwill = Super Profits \times No . of years of Purchase = ₹ (2, 36, 000 \times 3) = ₹ 7, 08, 000$

Page No 3.33:

Question 29:

â€‹ Varuna and Karuna are partners for equal shares. They admit Lata into partnership for 1/4th share. It was agreed to value goodwill of the firm at 4 years' purchase of super profit. Normal rate of return is 15% of the capital employed. Average profit of the firm is â‚¹ 4,00,000. Balance Sheet of the firm as at 31st March, 2019 was as follows:


Liabilities		Amount (â‚¹)	Assets	Amount â€‹(â‚¹)
Capital A/cs:			Furniture	4,00,000
Varuna	5,00,000		Computers	3,00,000
Karuna	5,00,000	10,00,000	Electrical Fittings	1,00,000
Long-term Loan		5,50,000	Investments (Trade)	2,00,000
Sundry Creditors		2,00,000	Stock	3,00,000
Outstanding Expenses		50,000	Sundry Debtors	3,00,000
Advances from Customers		1,50,000	Bills Receivable	50,000
			Cash in Hand	50,000
			Cash at Bank	2,00,000
			Deferred Revenue Expenditure:
			Advertisement Suspense	50,000
		19,50,000		19,50,000

â€‹Calculate the value of goodwill.

Answer:

$Average Profits = ₹ 4, 00, 000 Capital Employed = Total Assets - Fictitious Assets - Current Liabilities = ₹ (19, 50, 000 - 50, 000 - 4, 00, 000) = ₹ 15, 00, 000 Normal Profits = (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (15, 00, 000 \times \frac{15}{100}) = ₹ 2, 25, 000 Super Profits = Average Profits - Normal Profits = ₹ (4, 00, 000 - 2, 25, 000) = ₹ 1, 75, 000 Goodwill = Super Profits \times No . of Years of Purchase = ₹ (1, 75, 000 \times 4) = ₹ 7, 00, 000$

Page No 3.33:

Question 30:

A business earned an average profit of â‚¹ 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 â‚¹ 22,00,000 and â‚¹ 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at $2 \frac{1}{2}$ years' purchase of super profits.

Answer:

Page No 3.34:

Question 31:

Capital of the firm of Sharma and Verma is â‚¹ 2,00,000 and the market rate of interest is 15%. Annual salary to partners is â‚¹ 12,000 each. The profits for the last three years were â‚¹ 60,000; â‚¹ 72,000 and â‚¹ 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 3.34:

Question 32:

Supreet and Shubham are equal partners. They decide to admit Akriti for 1/3rd share. For the purpose of admission of Akriti, goodwill of the firm is to be valued at four years' purchase of super profit. Average capital employed in the firm is â‚¹ 1,50,000. Normal rate of return may be taken as 15% p.a. Average profit of the firm is â‚¹ 40,000. Calculate value of goodwill.

Answer:

$Average Profit of the firm = ₹ 40, 000 Capital Employed = ₹ 1, 50, 000 Normal Profit = (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (1, 50, 000 \times \frac{15}{100}) = ₹ 22, 500 Super Profits = Average Profits - Normal Profits = ₹ (40, 000 - 22, 500) = ₹ 17, 500 Goodwill = Super Profits \times No . of years of purchase = ₹ (17, 500 \times 4) = ₹ 70, 000$

Page No 3.34:

Question 33:

On 1st April, 2019, an existing firm had assets of â‚¹ 75,000 including cash of â‚¹ 5,000. Its creditors amounted to â‚¹ 5,000 on that date. The firm had a Reserve of â‚¹ 10,000 while Partners' Capital Accounts showed a balance of â‚¹ 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at â‚¹ 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 3.34:

Question 34:

Average profit earned by a firm is â‚¹ 1,00,000 which includes undervaluation of stock of â‚¹ 40,000 on an average basis. The capital invested in the business is â‚¹ 6,30,000 and the normal rate of return is 5%. Calculate goodwill of the firm on the basis of 5 times the super profit.

Answer:

$Average normal profit = (Average Profit + Undervaluation of stock on average basis *) = ₹ (1, 00, 000 + 40, 000) = ₹ 1, 40, 000 Capital Employed in the business = ₹ 6, 30, 000 Normal Profits = (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (6, 30, 000 \times \frac{5}{100}) = ₹ 31, 500 Super Profits = Average Normal Profits - Normal Profits = ₹ (1, 40, 000 - 31, 500) = ₹ 1, 08, 500 Goodwill = Super Profits \times No . of years of purchase = ₹ (1, 08, 500 \times 5) = ₹ 5, 42, 500 * S t o c k h a s b e e n t a k e n t o b e c l o s i n g s t o c k i f n o t h i n g i s s p e c i f i e d i n t h e q u e s t i o n$

Page No 3.34:

Question 35:

Average profit earned by a firm is â‚¹ 7,50,000 which includes overvaluation of stock of â‚¹ 30,000 on an average basis. The capital invested in the business is â‚¹ 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 3.34:

Question 36:

Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st April, 2019. 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 profits for the last 5 years were:

Year Ended	Net Profit (â‚¹)
31st March, 2015	1,50,000
31st March, 2016	1,80,000
31st March, 2017	1,00,000	(Including abnormal loss of â‚¹ 1,00,000)
31st March, 2018	2,60,000	(Including abnormal gain (profit) of â‚¹ 40,000)
31st March, 2019	2,40,000

The firm has total assets of â‚¹ 20,00,000 and Outside Liabilities of â‚¹ 5,00,000 as on that date. Normal Rate of Return in similar business is 10%.
Calculate value of goodwill.

Answer:

$\begin{array}{l} Goodwill = Super Profit \times No. of Years' Purchase \\ = 48,000 \times 3 = Rs 1,44,000 \end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits:

Year	Profit/(Loss) (Rs)	Adjustment	Normal Profit (â‚¹)
31 March, 2015	1,50,000	-	1,50,000
31 March, 2016	1,80,000	-	1,80,000
31 March, 2017	1,00,000	1,00,000	2,00,000
31 March, 2018	2,60,000	(40.000)	2,20,000
31 March, 2019	2,40,000	-	2,40,000
		Total Profit	9,90,000

WN2: Calculation of Super Profits

$table attributes columnalign left end attributes row cell text Average Profit end text equals fraction numerator text Total Profit of past given years end text over denominator text Number of Years end text end fraction end cell row cell text end text equals fraction numerator 9 comma 90 comma 000 over denominator 5 end fraction equals text â‚¹ 1,98,000 end text end cell row cell text Normal Profit end text equals text Capital Employed end text cross times fraction numerator text Normal Rate of Return end text over denominator 100 end fraction end cell row cell text end text equals text 15,00,000 end text cross times 10 over 100 equals text â‚¹ 1,50,000 end text end cell row cell text Super Profit end text equals text Average Profit end text minus text Normal Profit end text end cell row cell text end text equals text 1,98,000 end text minus text 1,50,000 end text equals text â‚¹ 48,000 end text end cell end table$

WN3: Calculation of Capital Employed

$\begin{array}{l} Capital Employed = Total Assets - Outside Liabilities \\ = 20,00,000 - 5,00,000 = ₹15,00,000 \end{array}$

Page No 3.34:

Question 37:

From the following information, calculate value of goodwill of the firm by applying Capitalisation Method: Total Capital of the firm â‚¹ 16,00,000.
Normal rate of return 10%. Profit for the year â‚¹ 2,00,000.

Answer:

Total Capital = Rs 16,00,000

Page No 3.34:

Question 38:

A business has earned average profit of â‚¹ 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 â‚¹ 10,00,000 and its external liabilities are â‚¹ 1,80,000. The normal rate of return is 10%.

Answer:

$Goodwill = Capitalised Value of Average Profits - Actual Capital Employed \begin{matrix} \begin{array}{rcl} Capitalised Value of Average Profit & = & Average Profit \times \frac{100}{Nominal Rate of Return} \\ = & 1, 00, 000 \times \frac{100}{10} = 10, 00, 000 \end{array} \end{matrix} Actual Capital Employed = 10, 00, 000 - 1, 80, 000 = 8, 20, 000 Goodwill = 10, 00, 000 - 8, 20, 000 = Rs 1, 80, 000$

Page No 3.35:

Question 39:

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: 2019 − â‚¹ 54,000; 2018 − â‚¹ 42,000; 2017 − â‚¹ 39,000; 2016 − â‚¹ 67,000 and 2015 − â‚¹ 59,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm â‚¹ 2,00,000.

Answer:

Page No 3.35:

Question 40:

A business has earned average profit of â‚¹ 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 â‚¹ 40,00,000 and its external liabilities â‚¹ 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 3.35:

Question 41:

A firm earns profit of â‚¹ 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 â‚¹ 55,00,000 and â‚¹ 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 3.35:

Question 42:

On 1st April, 2018, a firm had assets of â‚¹ 1,00,000 excluding stock of â‚¹ 20,000. The current liabilities were â‚¹ 10,000 and the balance constituted Partners' Capital Accounts. If the normal rate of return is 8%, the Goodwill of the firm is valued of â‚¹ 60,000 at four years' purchase of super profit, find the actual profits of the firm.

Answer:

$Total Assets of the firm = (Sundry Assets + Stock) = ₹ (1, 00, 000 + 20, 000) = ₹ 1, 20, 000 Current Liabilities of the firm = ₹ 10, 000 Capital Employed = (Total Assets - Current Liabilities) = ₹ (1, 20, 000 - 10, 000) = ₹ 1, 10, 000 Normal Profits = (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (1, 10, 000 \times \frac{8}{100}) = ₹ 8, 800 Goodwill = Super Profits \times No . of years of purchase 60, 000 = Super Profits \times 4 Super Profits = ₹ (\frac{60, 000}{4}) = ₹ 15, 000 Super Profits = Average Actual Profits - Normal Profits 15, 000 = Average Actual Profits - 8, 800 Average Actaul Profits = ₹ (15, 000 + 8, 800) = ₹ 23, 800$

Page No 3.35:

Question 43:

Average profit of the firm is â‚¹ 2,00,000. Total assets of the firm are â‚¹ 15,00,000 whereas Partners' Capital is â‚¹ 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:

$\begin{array}{l} Goodwill = Super Profit \times \frac{100}{Normal Rate of Return} \\ = 80,000 \times \frac{100}{10} = Rs 8,00,000 \end{array}$

Working Notes:

WN1: Calculation of Super Profits

$\begin{array}{l} Average Profit = \frac{Total Profit for past given years}{Number of Years} \\ = Rs 2,00,000 \\ Normal Profit = Capital Employed \times \frac{Normal Rate of Return}{100} \\ = 12,00,000 \times \frac{10}{100} = Rs 1,20,000 \\ Super Profit = Average Profit - Normal Profit \\ = 2, 00,000 - 1,20,000 = Rs 80,000 \end{array}$

WN2: Calculation of Capital Employed

$\begin{array}{l} Capital Employed = Total Assets - Outside Liabilities \\ = 15,00,000 - 3,00,000 = Rs 12,00,000 \end{array}$

Page No 3.35:

Question 44:

Rajan and Rajani are partners in a firm. Their capitals were Rajan â‚¹ 3,00,000; Rajani â‚¹ 2,00,000. During the year 2018−19, the firm earned a profit of â‚¹ 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:

$Goodwill = Super Profits \times \frac{100}{Nominal Rate of Return} Super Profits = Average Profit - Normal Profit Average Profit = ₹ 1, 50, 000 (Given) Normal Profit = Capital Employed \times Normal Rate of Return Normal Profit = (3, 00, 000 + 2, 00, 000) \times 20 % = ₹ 1, 00, 000 Super Profit = 1, 50, 000 - 1, 00, 000 = ₹ 50, 000 Goodwill = 50, 000 \times \frac{100}{20} = ₹ 2, 50, 000$

Page No 3.35:

Question 45:

Average profit of GS & Co. is â‚¹ 50,000 per year. Average capital employed in the business is â‚¹ 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) $\begin{array}{l} Goodwill = Super Profit \times No. of Years' Purchase \\ = 20,000 \times 3 = Rs 60,000 \end{array}$

(ii) $\begin{array}{l} Goodwill = Super Profit \times \frac{100}{Normal Rate of Return} \\ = 2 0,000 \times \frac{100}{10} = Rs 2,00,000 \end{array}$

Working Notes:

WN1: Calculation of Super Profits

$\begin{array}{l} Average Profit = \frac{Total Profits for past given years}{No. of Years} \\ = Rs 50,000 \\ Normal Profit = Capital Employed \times \frac{Normal Rate of Return}{100} \\ = 3,00,000 \times \frac{10}{100} = Rs 30,000 \\ Super Profit = Average Profit - Normal Profit \\ = 50,000 - 3 0,000 = Rs 20,000 \end{array}$

Page No 3.35:

Question 46:

A business has earned average profit of â‚¹ 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 profit.
â€‹Assets of the business were â‚¹ 40,00,000 and its external liabilities â‚¹ 7,20,000.

Answer:

$Capital Employed = Total Assets - External Liabilities = ₹ (40, 00, 000 - 7, 20, 000) = ₹ 32, 80, 000 Normal Profits = (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (32, 80, 000 \times \frac{10}{100}) = ₹ 3, 28, 000 Average Profits = ₹ 4, 00, 000 Super Profits = Average Profits - Normal Profits = ₹ (4, 00, 000 - 3, 28, 000) = ₹ 72, 000 (i) As per Capitalisation of Super Profit method, Goodwill = (Super Profit \times \frac{100}{Normal Rate of Return}) = ₹ (72, 000 \times \frac{100}{10}) = ₹ 7, 20, 000 (ii) As per Super Profit method, Goodwill = Super Profit \times No . of years of purchase = ₹ (72, 000 \times 3) = ₹ 2, 16, 000$

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Question 47:

Ajeet and Baljeet are partners in a firm. Their capitals are â‚¹ 9,00,000 and â‚¹ 6,00,000 respectively. During the year ended 31st March, 2019 the firm earned a profit of â‚¹ 4,50,000. Assuming that the normal rate of return is 20%, calculate value of goodwill of the firm:
(i) By Capitalisation Method; and
(ii) By Super Profit Method if the goodwill is valued at 2 years' purchase of super profit.

Answer:

$Capital Employed = (Total Liabilities - Current Liabilities) = ₹ (9, 00, 000 + 6, 00, 000) = ₹ 15, 00, 000 Normal Profits = (Capital Employed \times \frac{Normal Rate of Return}{100}) = ₹ (15, 00, 000 \times \frac{20}{100}) = ₹ 3, 00, 000 Average Profits = ₹ 4, 50, 000 Super Profits = Average Profits - Normal Profits = ₹ (4, 50, 000 - 3, 00, 000) = ₹ 1, 50, 000 (i) As per Capitalisation Method, Goodwill = (Super Profits \times \frac{100}{Normal Rate of Return}) = ₹ (1, 50, 000 \times \frac{100}{20}) = ₹ 7, 50, 000 (ii) As per Super Profit Method, Goodwill = Super Profit \times No . of years of purchase = ₹ (1, 50, 000 \times 2) = ₹ 3, 00, 000$

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Question 48:

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 â‚¹ 6,00,000.
(b) Net Profit/(Loss) of the firm for the last three years ended are:
31st March, 2018 − â‚¹ 2,00,000, 31st March, 2017 − â‚¹ 1,80,000, and 31st March, 2016 − â‚¹ 1,60,000.
(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of â‚¹ 1,00,000 to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) is â‚¹ 7,00,000 whereas Partners' Capital is â‚¹ 6,00,000 and Outside Liabilities â‚¹ 1,00,000.

Answer:

$\begin{array}{l} (i) Goodwill = Average Profit \times No. of years' purchase \\ = 8 0,000 \times 3 = Rs 2,40,000 \end{array}$

$\begin{array}{l} (ii) Goodwill = Super Profit \times No. of years' purchase \\ = 2 0,000 \times 3 = Rs 60,000 \end{array}$

$\begin{array}{l} (iii) Goodwill = Super Profit \times \frac{100}{Normal Rate of Return} \\ = 2 0,000 \times \frac{100}{10} = Rs 2,00,000 \end{array}$

$\begin{array}{l} (iv) Goodwill = Capitalised Value - Net Assets \\ = 8,00,000 - 6,00,000 = Rs 2,00,000 \end{array}$

Working Notes:

WN1: Calculation of Average and Super Profits

$\begin{array}{l} Average Profit = \frac{Total Profits of past years given}{No. of Years} = \frac{2, 00, 000 + 1, 80, 000 + 1, 60, 000}{3} \\ = Rs 1,80,000, \\ Average Profit (Adjusted) = Rs 1,80,000 - 1,00,000 (Remuneration to partners) \\ = Rs 80,000 \\ Normal Profit = Capital Employed \times \frac{Normal Rate of Return}{100} \\ = 6,00,000 \times \frac{10}{100} = Rs 60,000 \\ Super Profit = Average Profit (Adjusted) - Normal Profit \\ = 80,000 - 6 0,000 = Rs 20,000 \end{array}$

WN2: Calculation of Capital Employed

$\begin{array}{l} Capital Employed = Total Assets - Outside Liabilities \\ = 7,00,000 - 1,00,000 = Rs 6,00,000 \end{array}$

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