Double Entry Book Keeping Ts Grewal Vol. I 2019 Solutions for Class 12 Commerce Accountancy Chapter 3 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 2019 Book of Class 12 Commerce Accountancy Chapter 3 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 2019 Solutions. All Double Entry Book Keeping Ts Grewal Vol. I 2019 Solutions for class Class 12 Commerce Accountancy are prepared by experts and are 100% accurate.
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 − ₹ 12,000; 2017 − ₹ 18,000; 2018 − ₹ 16,000; 2019 − ₹ 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 − ₹ 4,00,000; Year 2016 − ₹ 3,98,000; Year 2017 − ₹ 4,50,000; Year 2018 − ₹ 4,45,000 and Year 2019 − ₹ 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 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  201819  201718  201617  201516  201415 
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 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 ₹ 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 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  201415  201516  201617  201718  201819 
Profits (₹)  14,000  15,500  10,000  16,000  15,000 
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 
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 (₹) 
31st March, 2019  2,88,000; 
31st March, 2018  1,81,800; 
31st March, 2017  1,87,200; 
31st March, 2016  2,53,200. 
Answer:
Average Profits of Previous three years= $\frac{2,88,000+1,81,8000+1,87,200}{3}=\u20b92,19,000$
Average Profits of Previous four years= $\frac{2,88,000+1,81,800+1,87,200+2,53,200}{4}=\u20b92,27,550$
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 = ₹2,27,550
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 financial years were:
201617  :  ₹ 1,00,000 (including an abnormal gain of ₹ 12,500). 
201718  :  ₹ 1,25,000 (after charging an abnormal loss of ₹ 25,000). 
201819  :  ₹ 1,12,500 (excluding ₹ 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 201617= (Total Profit  Abnormal Gain)= ₹$\left(1,00,00012,500\right)=\u20b987,500$
Normal Profit for the year 201718= (Total Profit + Abnormal Loss)= $\u20b9\left(1,25,000+25,000\right)=\u20b91,50,000$
Normal Profit for the year 201819= (Total Profit  Indirect Expenses)= $\u20b9\left(1,12,50012,500\right)=\u20b91,00,000$
$\mathrm{Average}\mathrm{Profits}=\frac{(\mathrm{Normal}\mathrm{Profits}\mathrm{for}201617)+(\mathrm{Normal}\mathrm{Profits}\mathrm{for}201718)+(\mathrm{Normal}\mathrm{Profits}\mathrm{for}201819)}{3}\phantom{\rule{0ex}{0ex}}$
$\mathrm{Average}\mathrm{Profits}=\frac{87,500+1,50,000+1,00,000}{3}=\u20b91,12,500$
$\mathrm{Goodwill}=\mathrm{Average}\mathrm{Profits}\mathrm{of}\mathrm{last}\mathrm{three}\mathrm{years}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\u20b9\left(1,12,500\times 2\right)=\u20b92,25,000$
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) (₹)  1,50,000  3,50,000  5,00,000  7,10,000  (5,90,000) 
Calculate the value of goodwill after adjusting the above.
Answer:
Normal Profits for the year ended 31st March, 2018:$=\left(\mathrm{Total}\mathrm{Profits}+\mathrm{Purchase}\mathrm{of}\mathrm{car}\mathrm{wrongly}\mathrm{debited}\mathrm{Depreciation}\mathrm{on}\mathrm{Car}\mathrm{Income}\mathrm{from}\mathrm{Non}\mathrm{trade}\mathrm{Investments}\right)\phantom{\rule{0ex}{0ex}}=\u20b9(7,10,000+1,00,00025,00010,000)=\u20b97,75,000$
Normal Profits for the year ended 31st March, 2019:
$=(\mathrm{Total}\mathrm{Loss}+\mathrm{Income}\mathrm{from}\mathrm{Non}\mathrm{Trade}\mathrm{Investments})\phantom{\rule{0ex}{0ex}}=\u20b9(5,90,000+10,000)=\u20b96,00,000$
$\mathrm{Average}\mathrm{Profits}=\frac{\mathrm{Normal}\mathrm{Profits}\mathrm{from}31\mathrm{st}\mathrm{March},2015\mathrm{to}31\mathrm{st}\mathrm{March},2019}{5}$
$\mathrm{Average}\mathrm{Profits}=\u20b9\left(\frac{1,50,000+3,50,000+5,00,000+7,75,000+6,00,000}{5}\right)=\u20b92,35,000$
$\mathrm{Goodwill}=\mathrm{Average}\mathrm{Profits}\mathrm{for}\mathrm{last}5\mathrm{years}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}$$=\u20b9(2,35,000\times 4)=\u20b99,40,000$
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 ₹ 30,000 (after debiting loss of stock by fire ₹ 40,000).
2018  Loss ₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).
2017  Profit ₹ 1,10,000 (including a gain (profit) of ₹ 30,000 on the sale of fixed assets).
Calculate the value of goodwill.
Answer:
Normal Profits for the year ended 31st March,2019=$\left(\mathrm{Total}\mathrm{Profits}+\mathrm{Loss}\mathrm{by}\mathrm{fire}\right)=\u20b9(30,000+40,000)=\u20b970,000$
Normal Profits for the year ended 31st March,2018= $\left(\mathrm{Total}\mathrm{loss}\mathrm{Voluntary}\mathrm{retirement}\mathrm{Compensation}\mathrm{paid}\right)=\u20b9(80,0001,10,000)$= ₹30,000
Normal Profits for the year ended 31st March,2017= $\u20b9\left(\mathrm{Total}\mathrm{Profit}\mathrm{Gain}\mathrm{on}\mathrm{sale}\mathrm{of}\mathrm{Fixed}\mathrm{Assets}\right)=\u20b9(1,10,00030,000)$= ₹80,000
$\mathrm{Average}\mathrm{Profits}=\left(\frac{\mathrm{Normal}\mathrm{Profits}\mathrm{from}31\mathrm{st}\mathrm{March},2017\mathrm{to}31\mathrm{st}\mathrm{March},2019}{3}\right)=\left(\frac{70,000+30,000+80,000}{3}\right)=\u20b960,000$
$\mathrm{Goodwill}=\mathrm{Average}\mathrm{Profits}\mathrm{for}\mathrm{last}3\mathrm{years}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}=\u20b9(60,000\times 2)=\u20b91,20,000$
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 ₹ 50,000 (including profit on sale of assets ₹ 5,000).
2018  Loss ₹ 20,000 (including loss by fire ₹ 30,000).
2019  Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.
Answer:
$\mathrm{Normal}\mathrm{Profits}\mathrm{for}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2017=(\mathrm{Total}\mathrm{Profits}\mathrm{Profit}\mathrm{on}\mathrm{Sale}\mathrm{of}\mathrm{Assets})=\u20b9(50,0005,000)=\u20b945,000$
$\mathrm{Normal}\mathrm{Profits}\mathrm{for}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2018=(\mathrm{Loss}\mathrm{by}\mathrm{fire}\mathrm{Total}\mathrm{Loss})=\u20b9(20,00030,000)=\u20b910,000$
$\mathrm{Normal}\mathrm{Profit}\mathrm{for}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2019=(\mathrm{Total}\mathrm{Profit}\mathrm{Insurnace}\mathrm{Claim}\mathrm{Received}\mathrm{Interest}\mathrm{on}\mathrm{Invetsment}\mathrm{Dividend}\mathrm{Received})\phantom{\rule{0ex}{0ex}}=\u20b9(70,00018,0008,000)=\u20b944,000$
$\mathrm{Average}\mathrm{Profits}=\u20b9\left(\frac{\mathrm{Normal}\mathrm{Profits}\mathrm{from}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2017\mathrm{to}31\mathrm{st}\mathrm{March},2019}{3}\right)=\u20b9\left(\frac{45,000+10,000+44,000}{3}\right)=\u20b933,000$
$\mathrm{Goodwill}=\mathrm{Average}\mathrm{Profits}\mathrm{for}\mathrm{the}\mathrm{last}\mathrm{three}\mathrm{years}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=\u20b9(33,000\times 2)=\u20b966,000$
$\mathrm{Kanika}\text{'}\mathrm{s}\mathrm{Share}\mathrm{of}\mathrm{Goodwill}=\u20b9\left(66,000\times \frac{1}{4}\right)=\u20b916,500$
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 (₹)  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, 2016.
(ii) A fixed asset was sold in the year ended 31st March, 2017 and gain (profit) of ₹ 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 ₹ 15,000.
Calculate the value of goodwill.
Answer:
$\begin{array}{l}\text{Goodwill}=\text{AverageProfit}\times \text{No.ofyears'purchase}\\ \text{}=1,41,250\times 2=\text{\u20b92,82,500}\end{array}$
Working Notes:
WN: 1 Calculation of Normal Profits
Year 
Profit/(Loss) (₹) 
Adjustment 
Normal Profit (₹) 
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
$\begin{array}{l}\text{AverageProfit}=\frac{\text{TotalProfitforpastgivenyears}}{\text{NumberofYears}}\\ \text{}=\frac{5,65,000}{4}=\text{\u20b91,41,250}\end{array}$
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:
Year Ended  31st March, 2015  31st March, 2016  31st March, 2017  31st March, 2018  31st March, 2019 
Profits (₹)  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, 2016. 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, 2017 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2017 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:
Particulars 
Year 
31^{st }Mar., 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 







$\mathrm{Average}\mathrm{Profits}=\left(\frac{\mathrm{Normal}\mathrm{profits}\mathrm{from}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2015\mathrm{to}31\mathrm{st}\mathrm{March},2019}{5}\right)\phantom{\rule{0ex}{0ex}}=\u20b9\left(\frac{90,000+1,10,000+1,70,000+1,50,000+1,60,000}{5}\right)=\u20b91,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Average}\mathrm{profits}\mathrm{of}\mathrm{the}\mathrm{last}5\mathrm{years}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=\u20b9(1,00,000\times 3)=\u20b93,00,000$
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 (₹)  20,000  24,000  30,000  25,000  18,000 
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: 201617 : ₹ 2,00,000; 201718 : ₹ 2,30,000; 201819 : ₹ 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 
201617 
2,00,000 
– 
90,000 
= 
1,10,000 
201718 
2,30,000 
– 
90,000 
= 
1,40,000 
201819 
2,50,000 
– 
90,000 
= 
1,60,000 
Year 
Profit 
× 
Weight 
= 
Product 
201617 
1,10,000 
× 
1 
= 
1,10,000 
201718 
1,40,000 
× 
2 
= 
2,80,000 
201819 
1,60,000 
× 
3 
= 
4,80,000 

Total 

6 

8,70,000 






$\mathrm{Weighted}\mathrm{Average}\mathrm{Profit}=\frac{\mathrm{Total}\mathrm{Product}\mathrm{of}\mathrm{Profits}}{\mathrm{Total}\mathrm{of}\mathrm{Weights}}\phantom{\rule{0ex}{0ex}}\mathrm{or},\mathrm{Weighted}\mathrm{Average}\mathrm{Profit}=\frac{8,70,000}{6}=\u20b91,45,000$
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 ₹ 50,000 and ₹ 40,000 respectively. The annual accounts have shown the following net profit before charging partners' salaries:
Year ended 31st March, 2017 − ₹ 1,40,000; 2018 − ₹ 1,01,000 and 2019 − ₹ 1,30,000.
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 (₹) 
Profits after charging Salary (₹) 
Weights 
Weighted Profits (₹) 
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 
$\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}=\left(\frac{\mathrm{Total}\mathrm{of}\mathrm{Weighted}\mathrm{Profits}}{\mathrm{Total}\mathrm{Weights}}\right)=\u20b9\left(\frac{1,92,000}{6}\right)=\u20b932,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}\phantom{\rule{0ex}{0ex}}=\u20b9(32,000\times 4)=\u20b91,28,000$
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 − ₹ 25,000; 2017 − ₹ 27,000; 2018 − ₹ 46,900 and 2019 − ₹ 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 ₹ 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 ₹ 1,000 and ₹ 2,000 respectively.
(iii) To cover management cost an annual charge of ₹ 5,000 should be made for the purpose of goodwill valuation.
Answer:
Particulars 
Year 
31^{st }Mar., 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 






Year 
Normal Profits (₹) 
Weights 
Weighted Profits (₹) 
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 
$\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}=\left(\frac{\mathrm{Total}\mathrm{of}\mathrm{Weighted}\mathrm{Profits}}{\mathrm{Total}\mathrm{Weights}}\right)=\u20b9\left(\frac{4,00,000}{10}\right)=\u20b940,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=\u20b9(40,000\times 3)=\u20b91,20,000\phantom{\rule{0ex}{0ex}}$
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 ₹ 50,000 (including profits on sale of assets ₹ 5,000).
2018 − Loss ₹ 20,000 (including loss by fire ₹ 35,000).
2019 − Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and dividend received ₹ 8,000).
Calculate the value of goodwill. Also, calculate the goodwill brought in by Ramesh.
Answer:
Normal Profits for the year 2017$=\left(\mathrm{Total}\mathrm{Profits}\mathrm{Profit}\mathrm{on}\mathrm{Sale}\mathrm{of}\mathrm{Assets}\right)=\u20b9(50,0005,000)=\u20b945,000$
Normal Profits for the year 2018$=\left(\mathrm{Loss}\mathrm{by}\mathrm{Fire}\mathrm{Total}\mathrm{Loss}\right)=\u20b9(35,00020,000)=\u20b915,000$
Normal Profits for the year 2019$=\left(\mathrm{Total}\mathrm{Profit}\mathrm{Insurance}\mathrm{Claim}\mathrm{Received}\mathrm{Dividend}\mathrm{Received}\right)=\u20b9(70,00018,0008,000)=\u20b944,000$
Year 
Normal Profits (₹) 
Weights 
Weighted Profits (₹) 
2017 
45,000 
1 
45,000 
2018 
15,000 
2 
30,000 
2019 
44,000 
3 
1,32,000 
Total 
6 
2,07,000 
$\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}=\left(\frac{\mathrm{Total}\mathrm{of}\mathrm{Weighted}\mathrm{Profits}}{\mathrm{Toatal}\mathrm{of}\mathrm{Weights}}\right)=\u20b9\left(\frac{2,07,000}{6}\right)=\u20b934,500\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=\u20b9(34,500\times 2)=\u20b969,000\phantom{\rule{0ex}{0ex}}\mathrm{Ramesh}\text{'}\mathrm{s}\mathrm{Share}\mathrm{of}\mathrm{Goodwill}=\u20b9\left(69,000\times \frac{1}{4}\right)=\u20b917,250$
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: ₹ 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, 2015.
(ii) There was an abnormal gain (profit) of ₹ 30,000 in the year ended 31st March, 2016.
(iii) Closing Stock as on 31st March, 2018 was overvalued by ₹ 10,000.
Calculate the value of goodwill.
Answer:
$\begin{array}{l}\text{Goodwill}=\text{WeightedAverageProfit}\times \text{No.ofyears'Purchase}\\ \text{}=1,39,000\times 3=\text{\u20b94,17,000}\end{array}$
Working Notes:
WN: 1 Calculation of Normal Profits:
Year 
Profit/(Loss) (₹) 
Adjustment 
Normal Profit (₹) 
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 
$\begin{array}{l}\text{WeightedAverageProfit}=\frac{\text{TotalofProfitProduct}}{\text{Totalof\hspace{0.17em}Weights}}\\ \text{}=\frac{20,85,000}{15}=\u20b9\text{1,39,000}\end{array}$
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 (₹)  1,25,000  1,40,000  1,20,000  55,000  2,57,000 
(i) A secondhand machine was purchased for ₹ 5,00,000 on 1st July, 2017 and ₹ 1,00,000 were spent to make it operational. ₹ 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 ₹ 50,000.
(iii) Remuneration to partners was to be considered as charge against profit and remuneration of ₹ 20,000 p.a. for each partner was considered appropriate.
Calculate the value of goodwill.
Answer:
Particulars 
Year 
31^{st }Mar., 2015(₹) 
31^{st} Mar., 2016(₹) 
31^{st} Mar., 2017(₹) 
31^{st} Mar., 2018(₹) 
31^{st} Mar., 2019(₹) 
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 (₹) 
Weights 
Weighted Profits (₹) 
31^{st }Mar., 2015 
85,000 
1 
85,000 
31^{st }Mar., 2016 
1,00,000 
2 
2,00,000 
31^{st }Mar., 2017 
80,000 
3 
2,40,000 
31^{st }Mar., 2018 
1,50,000 
4 
6,00,000 
31^{st }Mar., 2019 
1,50,000 
5 
7,50,000 
Total 
15 
18,75,000 
$\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}=\left(\frac{\mathrm{Total}\mathrm{of}\mathrm{Weighted}\mathrm{Profits}}{\mathrm{Total}\mathrm{of}\mathrm{Weights}}\right)=\u20b9\left(\frac{18,75,000}{15}\right)=\u20b91,25,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Weightes}\mathrm{Average}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}=\u20b9(1,25,000\times 3)=\u20b93,75,000\phantom{\rule{0ex}{0ex}}$
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  201516  201617  201718  201819 
Profits (₹)  1,01,000  1,24,000  1,00,000  1,40,000 
Weights  1  2  3  4 
(i) On 1st December, 2017, 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 201617 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) On 1st April, 2016, 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 
201516 
201617 
201718 
201819 
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:
Note 1: Depreciation on ₹ 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 ₹ 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 ₹ 80,000 which includes undervaluation of stock of ₹ 8,000 on an average basis. The capital invested in the business is ₹ 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:
$\mathrm{Average}\mathrm{Normal}\mathrm{Profits}\mathrm{of}\mathrm{the}\mathrm{firm}=(\mathrm{Average}\mathrm{Profits}+\mathrm{Undervaluation}\mathrm{of}\mathrm{Stock})=\u20b9(80,000+8,000)=\u20b988,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profits}=\u20b9\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(8,00,000\times \frac{8}{100}\right)=\u20b964,000\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}=\u20b9(88,00064,000)=\u20b924,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=\u20b9(24,000\times 7)=\u20b91,68,000$
Page No 3.32:
Question 22:
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 3.32:
Question 23:
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 3.32:
Question 24:
Rakesh and Ashok earned a profit of ₹ 5,000. They employed capital of ₹ 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:
$\mathrm{Actual}\mathrm{Profits}\mathrm{of}\mathrm{the}\mathrm{firm}=\u20b95,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(25,000\times \frac{15}{100}\right)=\u20b93,750\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Actual}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}=\u20b9(5,0003,750)=\u20b91,250\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=\u20b9(1,250\times 3)=\u20b93,750$
Page No 3.32:
Question 25:
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 3.32:
Question 26:
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 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 (₹)  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 
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 ₹ 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 (₹) 
Assets  Amount (₹) 

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   23,00,000  
Calculate the value of goodwill, if it is valued at three years' purchase of Super Profits.
Answer:
$\mathrm{Average}\mathrm{Profits}=\u20b94,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Capital}\mathrm{Employed}=\mathrm{Total}\mathrm{Assets}\mathrm{Non}\mathrm{Trade}\mathrm{Investments}\mathrm{Outside}\mathrm{Liabilities}=\u20b9(23,00,0001,00,0005,60,000)=\u20b916,40,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(16,40,000\times \frac{10}{100}\right)=\u20b91,64,000\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}=\u20b9(4,00,0001,64,000)=\u20b92,36,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=\u20b9(2,36,000\times 3)=\u20b97,08,000$
Page No 3.33:
Question 29:
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 ₹ 4,00,000. Balance Sheet of the firm as at 31st March, 2019 was as follows:
Liabilities  Amount (₹) 
Assets  Amount (₹) 

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 
Longterm 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  
Calculate the value of goodwill.
Answer:
$\mathrm{Average}\mathrm{Profits}=\u20b94,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Capital}\mathrm{Employed}=\mathrm{Total}\mathrm{Assets}\mathrm{Fictitious}\mathrm{Assets}\mathrm{Current}\mathrm{Liabilities}=\u20b9(19,50,00050,0004,00,000)=\u20b915,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(15,00,000\times \frac{15}{100}\right)=\u20b92,25,000\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}=\u20b9(4,00,0002,25,000)=\u20b91,75,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{Years}\mathrm{of}\mathrm{Purchase}=\u20b9(1,75,000\times 4)=\u20b97,00,000$
Page No 3.33:
Question 30:
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 3.34:
Question 31:
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 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 ₹ 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:
$\mathrm{Average}\mathrm{Profit}\mathrm{of}\mathrm{the}\mathrm{firm}=\u20b940,000\phantom{\rule{0ex}{0ex}}\mathrm{Capital}\mathrm{Employed}=\u20b91,50,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profit}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(1,50,000\times \frac{15}{100}\right)=\u20b922,500\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}=\u20b9(40,00022,500)=\u20b917,500\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}=\u20b9(17,500\times 4)=\u20b970,000$
Page No 3.34:
Question 33:
On 1st April, 2019, 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 3.34:
Question 34:
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 rate of return is 5%. Calculate goodwill of the firm on the basis of 5 times the super profit.
Answer:
$\mathrm{Average}\mathrm{normal}\mathrm{profit}=(\mathrm{Average}\mathrm{Profit}+\mathrm{Undervaluation}\mathrm{of}\mathrm{stock}\mathrm{on}\mathrm{average}\mathrm{basis}*)\phantom{\rule{0ex}{0ex}}=\u20b9(1,00,000+40,000)=\u20b91,40,000\phantom{\rule{0ex}{0ex}}\mathrm{Capital}\mathrm{Employed}\mathrm{in}\mathrm{the}\mathrm{business}=\u20b96,30,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(6,30,000\times \frac{5}{100}\right)=\u20b931,500\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Normal}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}=\u20b9(1,40,00031,500)=\u20b91,08,500\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}=\u20b9(1,08,500\times 5)=\u20b95,42,500\phantom{\rule{0ex}{0ex}}\phantom{\rule{0ex}{0ex}}*Stockhasbeentakentobeclosingstockifnothingisspecifiedinthequestion$
Page No 3.34:
Question 35:
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 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 (₹)  
31st March, 2015  1,50,000  
31st March, 2016  1,80,000  
31st March, 2017  1,00,000  (Including abnormal loss of ₹ 1,00,000) 
31st March, 2018  2,60,000  (Including abnormal gain (profit) of ₹ 40,000) 
31st March, 2019  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 (₹) 
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
WN3: Calculation of Capital Employed
$\begin{array}{l}\text{CapitalEmployed}=\text{TotalAssets}\text{OutsideLiabilities}\\ \text{}=\text{20,00,000}\text{5,00,000}=\text{\u20b915,00,000}\end{array}$
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 ₹ 16,00,000.
Normal rate of return 10%. Profit for the year ₹ 2,00,000.
Answer:
Total Capital = Rs 16,00,000
Page No 3.34:
Question 38:
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 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 − ₹ 54,000; 2018 − ₹ 42,000; 2017 − ₹ 39,000; 2016 − ₹ 67,000 and 2015 − ₹ 59,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm ₹ 2,00,000.
Answer:
Page No 3.35:
Question 40:
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 3.35:
Question 41:
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 3.35:
Question 42:
On 1st April, 2018, a firm had assets of ₹ 1,00,000 excluding stock of ₹ 20,000. The current liabilities were ₹ 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 ₹ 60,000 at four years' purchase of super profit, find the actual profits of the firm.
Answer:
$\mathrm{Total}\mathrm{Assets}\mathrm{of}\mathrm{the}\mathrm{firm}=(\mathrm{Sundry}\mathrm{Assets}+\mathrm{Stock})=\u20b9(1,00,000+20,000)=\u20b91,20,000\phantom{\rule{0ex}{0ex}}\mathrm{Current}\mathrm{Liabilities}\mathrm{of}\mathrm{the}\mathrm{firm}=\u20b910,000\phantom{\rule{0ex}{0ex}}\mathrm{Capital}\mathrm{Employed}=(\mathrm{Total}\mathrm{Assets}\mathrm{Current}\mathrm{Liabilities})=\u20b9(1,20,00010,000)=\u20b91,10,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(1,10,000\times \frac{8}{100}\right)=\u20b98,800\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}\phantom{\rule{0ex}{0ex}}60,000=\mathrm{Super}\mathrm{Profits}\times 4\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\u20b9\left(\frac{60,000}{4}\right)=\u20b915,000\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Actual}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}\phantom{\rule{0ex}{0ex}}15,000=\mathrm{Average}\mathrm{Actual}\mathrm{Profits}8,800\phantom{\rule{0ex}{0ex}}\mathrm{Average}\mathrm{Actaul}\mathrm{Profits}=\u20b9(15,000+8,800)=\u20b923,800$
Page No 3.35:
Question 43:
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 3.35:
Question 44:
Rajan and Rajani are partners in a firm. Their capitals were Rajan ₹ 3,00,000; Rajani ₹ 2,00,000. During the year 2018−19, 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:
$\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \frac{100}{\mathrm{Nominal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profit}\mathrm{Normal}\mathrm{Profit}\phantom{\rule{0ex}{0ex}}\mathrm{Average}\mathrm{Profit}=\u20b91,50,000\left(\mathrm{Given}\right)\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profit}=\mathrm{Capital}\mathrm{Employed}\times \mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profit}=(3,00,000+2,00,000)\times 20\%=\u20b91,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profit}=1,50,0001,00,000=\u20b950,000\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=50,000\times \frac{100}{20}=\u20b92,50,000$
Page No 3.35:
Question 45:
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 3.35:
Question 46:
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 profit.
Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
Answer:
$\mathrm{Capital}\mathrm{Employed}=\mathrm{Total}\mathrm{Assets}\mathrm{External}\mathrm{Liabilities}=\u20b9(40,00,0007,20,000)=\u20b932,80,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(32,80,000\times \frac{10}{100}\right)=\u20b93,28,000\phantom{\rule{0ex}{0ex}}\mathrm{Average}\mathrm{Profits}=\u20b94,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}=\u20b9(4,00,0003,28,000)=\u20b972,000\phantom{\rule{0ex}{0ex}}\left(\mathrm{i}\right)\mathrm{As}\mathrm{per}\mathrm{Capitalisation}\mathrm{of}\mathrm{Super}\mathrm{Profit}\mathrm{method},\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\left(\mathrm{Super}\mathrm{Profit}\times \frac{100}{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}\right)=\u20b9\left(72,000\times \frac{100}{10}\right)=\u20b97,20,000\phantom{\rule{0ex}{0ex}}\left(\mathrm{ii}\right)\mathrm{As}\mathrm{per}\mathrm{Super}\mathrm{Profit}\mathrm{method},\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profit}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}=\u20b9(72,000\times 3)=\u20b92,16,000$
Page No 3.36:
Question 47:
Ajeet and Baljeet are partners in a firm. Their capitals are ₹ 9,00,000 and ₹ 6,00,000 respectively. During the year ended 31st March, 2019 the firm earned a profit of ₹ 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:
$\mathrm{Capital}\mathrm{Employed}=(\mathrm{Total}\mathrm{Liabilities}\mathrm{Current}\mathrm{Liabilities})=\u20b9(9,00,000+6,00,000)=\u20b915,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=\u20b9\left(15,00,000\times \frac{20}{100}\right)=\u20b93,00,000\phantom{\rule{0ex}{0ex}}\mathrm{Average}\mathrm{Profits}=\u20b94,50,000\phantom{\rule{0ex}{0ex}}\mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}\mathrm{Normal}\mathrm{Profits}=\u20b9(4,50,0003,00,000)=\u20b91,50,000\phantom{\rule{0ex}{0ex}}\left(\mathrm{i}\right)\mathrm{As}\mathrm{per}\mathrm{Capitalisation}\mathrm{Method},\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\left(\mathrm{Super}\mathrm{Profits}\times \frac{100}{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}\right)=\u20b9\left(1,50,000\times \frac{100}{20}\right)=\u20b97,50,000\phantom{\rule{0ex}{0ex}}\left(\mathrm{ii}\right)\mathrm{As}\mathrm{per}\mathrm{Super}\mathrm{Profit}\mathrm{Method},\phantom{\rule{0ex}{0ex}}\mathrm{Goodwill}=\mathrm{Super}\mathrm{Profit}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}=\u20b9(1,50,000\times 2)=\u20b93,00,000$
Page No 3.36:
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 ₹ 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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