Chapter 3 – Goodwill: Nature & Valuation
TS Grewal Solution 2020-21
Average Profit Method
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:
2017 − Rs. 12,000; 2018 − Rs. 18,000; 2019 − Rs. 16,000; 2020 − Rs. 14,000.
Calculate amount of Goodwill.
Answer
Number of Years’ Purchase = 3
Average Profit = Sum Total Profit of past given years / Number of Years
Average profit = (12,000 + 18,000 + 16,000 + 14,000) /4= 60,000 / 4 = Rs. 15,000
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill= Rs. 15,000 × 3 = Rs. 45,000
Question 2
Profits for the five years ending on 31st March, are as follows:
Year 2016 − Rs. 4,00,000; Year 2017 − Rs. 3,98,000; Year 2018 − Rs. 4,50,000; Year 2019 − Rs. 4,45,000 and Year 2020 − Rs. 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.
Answer
Number of Years’ Purchase = 4
Average Profit = Sum Total Profit of past given years / Number of Years
Average profit = (4,00,000 + 3,98,000 + 4,50,000 + 4,45,000 + 5,00,000) /5 =21,93,000 / 5 = Rs. 4,38,600
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill= Rs. 4,38,600 × 4 = Rs. 17,54,400
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 | 2020 | 2019 | 2018 | 2017 | 2016 |
Profits ( Rs.) | 8,00,000 | 15,00,000 | 18,00,000 | 4,00,000 (Loss) | 13,00,000 |
Answer
Number of Years’ Purchase = 3
Average Profit = Sum Total Profit of past given years / Number of Years
Average profit = (8,00,000 + 15,00,000 + 18,00,000 + (4,00,000) + 13,00,000) /5 = Rs. 50,00,000 / 5 = Rs. 10,00,000
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill= Rs. 10,00,000 × 3 = Rs. 30,00,000
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 Rs. 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
No. of Year’s Purchases = 3
Average profit = (1,00,000 + 2,00,000 + 3,00,000) / 3 = Rs. 6,00,000 / 3 = Rs. 2,0,000
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill= Rs. 2,00,000 × 1.5 = Rs. 3,00,000
Working Notes
1. Calculation of Profit
Year | Profit | |
1st Year | 1,00,000 | |
2nd Year | 2,00,000 | Twice of first year |
3rd Year | 3,00,000 | One half times of 2nd year |
Total Profit | 6,00,000 |
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, 2020. 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 | 2016 | 2017 | 2018 | 2019 | 2020 |
Profits(Rs) | 14,000 | 15,500 | 10,000 | 16,000 | 15,000 |
Answer
5 Years Average profit = (14,000 + 15,500 + 10,000 + 16,000 + 15,000) / 5 = Rs. 70,500/5 = Rs. 14,100
4 Years Average profit = (15,500 + 10,000 + 16,000 + 15,000) / 4 = Rs. 56,500/4 = Rs. 14,125
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill= Rs. 14,125 × 4 = Rs. 56,500
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, 2020 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 (Rs.)
31st March, 2020 2,88,000;
31st March, 2019 1,81,800;
31st March, 2018 1,87,200;
31st March, 2017 2,53,200.
Calculate the value of goodwill.
Answer
Goodwill= 100% of the average of annual profit = Rs. 2,27,500
Calculation of Average Profit
Year | 4 Years Profits | 3 Years Profits |
31st March, 2020 | 2,88,000 | |
31st March, 2019 | 1,81,800 | 1,81,800 |
31st March, 2018 | 1,87,200 | 1,87,200 |
31st March, 2017 | 2,53,200 | 2,53,200 |
Total Profit | 9,10,200 | 6,22,200 |
Average Profits | 2,27,550 | 2,07,400 |
Average Profit Method when Past Adjustments Are Made
Question 7
Ram and Mohan were partners sharing profits and losses in the ratio of 2 : 1. They admitted Shyam as a partner for 1/5th share in the profits. For this purpose, the Goodwill of the firm was to be valued on the. basis of three years' purchases of last five years' average profit.
Year | 2016 | 2017 | 2018 | 2019 | 2020 |
Profits (Rs) | 1,25,000 | 1,00,000 | 1,87,500 | (62,500) | 1,25,000 |
Answer
No. of Year’s Purchases = 3
Average Profit = Rs. 5,00,000 / 5 = Rs. 1,00,000
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill= Rs. 1,00,00 × 3 = Rs. 3,00,000
Working Note:
1. Calculation of Normal Business Profit.
Year | Profits(Rs) | Adjustment | Normal Profit |
2016 | 1,25,000 | - | 1,25,000 |
2017 | 1,00,000 | 25000 | 1,25,000 |
2018 | 1,87,500 | - | 1,87,500 |
2019 | (62,500) | - | (62,500) |
2020 | 1,25,000 | - | 1,25,000 |
Total Profit | 4,75,000 | 25,000 | 5,00,000 |
Question 8
Divya purchased Jyoti's business with effect from 1st April, 2020. Profits shown by Jyoti's business for the last three financial years were:
2018: Rs. 1,00,000 (including an abnormal gain of Rs. 12,500).
2019: Rs. 1,25,000 (after charging an abnormal loss of Rs. 25,000).
2020: Rs. 1,12,500 (excluding Rs. 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
No. of Year’s Purchases = 2
Average Profit = Rs. 3,37,500 /3 = Rs. 1,12,500
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill= Rs. 1,12,500 × 2 = Rs. 2,25,000
Working Note:
Calculation of Normal Business Profit.
Year | Profits(Rs) | Adjustment | Normal Profit | |
2018 | 1,00,000 | (12,500) | 87,500 | Less; Abnormal Gain |
2019 | 1,25,000 | 25,000 | 1,50,000 | Add; Abnormal Gain |
2020 | 1,12,500 | (12,500) | 1,00,000 | Less; Expenses excluded |
Total Profit | 3,37,500 | 0 | 3,37,500 |
Question 9
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 | 2,016 | 2,017 | 2,017 | 2,019 | 2,020 |
Profit/(Loss)(Rs.) | 1,50,000 | 3,50,000 | 5,00,000 | 7,10,000 | (5,90,000) |
On 1st April, 2019, a car costing Rs. 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. Interest of Rs. 10,000 on Non-Trade Investments is credit to income for the year ended 31st March, 2019 and 2020.
Calculate the value of goodwill after adjusting the above.
Answer
No. of Year’s Purchases = 4
Average Profit = Rs. 11,75,000 /5 = Rs. 2,30,000
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill = Rs. 2,37,000 × 4 = Rs. 9,40,000
Working Note:
Calculation of Normal Business Profit.
Year | Profits (Rs) | Adjustment | Normal Profit | |
2016 | 1,50,000 | - | 1,50,000 | |
2017 | 3,50,000 | - | 3,50,000 | |
2017 | 5,00,000 | - | 5,00,000 | |
2019 | 7,10,000 | 65,000 | 7,75,000 | Add; Value of Car (-) Depreciation; (-) Interest |
2020 | (5,90,000) | (10,000) | (6,00,000) | Less; Interest |
Total Profit | 11,20,000 | 11,75,000 |
Question 10
Arun and Bharat are partners sharing profits in the ratio of 3 : 2. They decided to admit Manu as a partner from 1st April, 2020 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:
2020 - Profit Rs. 30,000 (after debiting loss of stock by fire Rs. 40,000).
2019 - Loss Rs. 80,000 (includes voluntary retirement compensation paid Rs. 1,10,000).
2018 - Profit Rs. 1,10,000 (including a gain (profit) of Rs. 30,000 on the sale of fixed assets).
Calculate the value of goodwill.
Answer
No. of Year’s Purchases = 2
Average Profit = Rs. 1,80,000 /3 = Rs. 60,000
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill = Rs. 60,000 × 2 = Rs. 1,20,000
Working Note:
Calculation of Normal Business Profit.
Year | Profits(Rs) | Adjustment | Normal Profit | |
2020 | 30,000 | 40,000 | 70,000 | Add; Abnormal Loss |
2019 | (80,000) | 1,10,000 | 30,000 | Add; Capital Expenses |
2018 | 1,10,000 | (30,000) | 80,000 | Less; Profit on sale of Fixed Assets |
Total Profit | 60,000 | | 1,80,000 |
Question 11
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:
2018 - Profit Rs. 50,000 (including profit on sale of assets Rs. 5,000).
2019 - Loss Rs. 20,000 (including loss by fire Rs. 30,000).
2020 - Profit Rs. 70,000 (including insurance claim received Rs. 18,000 and interest on investments and Dividend received Rs. 8,000).
Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.
Answer
No. of Year’s Purchases = 2
Average Profit = Rs. 99,000 /3 = Rs. 33,000
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill = Rs. 33,000 × 2 = Rs. 66,000
Kanika share of Goodwill = Rs. 66,000 x ¼ = Rs. 16,500
Working Note:
Calculation of Normal Business Profit.
Year | Profits(Rs) | Adjustment | Normal Profit | |
2020 | 50,000 | (5,000) | 45,000 | Less; Profit on sale of Fixed Assets |
2019 | (20,000) | 30,000 | 10,000 | Add; Abnormal Loss |
2018 | 70,000 | (26,000) | 44,000 | Less; Claim Receivable & Interest on Dividend |
Total Profit | 1,00,000 | | 99,000 |
Question 12
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, 2017 | 31st March, 2018 | 31st March, 2019 | 31st March, 2020 |
Profits (Rs.) | 80,000 | 1,45,000 | 1,60,000 | 2,00,000 |
Books of Account revealed that:
(i) Abnormal loss of Rs. 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2017.
(ii) A fixed asset was sold in the year ended 31st March, 2018 and gain (profit) of Rs. 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2019 assets of the firm were not insured due to oversight. Insurance premium not paid was Rs. 15,000.
Calculate the value of goodwill.
Answer
No. of Year’s Purchases = 2
Average Profit = Rs. 5,65,000 /4 = Rs. 1,41,250
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill = Rs. 1,41,250 × 2 = Rs. 2,82,800
Working Note:
Calculation of Normal Business Profit.
Year | Profits(Rs) | Adjustment | Normal Profit | |
31st March, 2017 | 80,000 | 20,000 | 1,00,000 | Add; Abnormal Loss |
31st March, 2018 | 1,45,000 | (25,000) | 1,20,000 | Less; Profit on sale of Fixed Assets |
31st March, 2019 | 1,60,000 | (15,000) | 1,45,000 | Less; Expenses over charged |
31st March, 2020 | 2,00,000 | - | 2,00,000 | |
Total Profit | 5,85,000 | | 5,65,000 |
Question 13
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, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 | 31st March, 2020 |
Profits ( Rs) | 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 Rs. 50,000 from sale of machinery sold in the year ended 31st March, 2017. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of Rs. 20,000 incurred in the year ended 31st March, 2018 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2018 amounting to Rs. 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
No. of Year’s Purchases = 3
Average Profit = (-90,000 +1,10,000 + 2,55,000 + 48,000 + 1,63,400) / 5 = Rs. 4,86,400/5 = Rs. 97,280
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill = Rs. 97,280 × 3 = Rs. 2,91,840
Working Note:
Calculation of Normal Business Profit.
Particular / Year Ended | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 | 31st March, 2020 |
Profits ( Rs) | (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; Value of Machinery | - | - | 1,00,000 | | |
Less; Depreciation | - | - | (15,000) | (17,000) | (13,600) |
Normal Profit | (90,000) | 1,10,000 | 2,55,000 | 48,000 | 1,63,400 |
Exception
If the year of 3rd adjustment will be changed to 2019, answer will be same as given in books.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2019 amounting to Rs. 1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.
Calculate the value of goodwill
Year Ended | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 | 31st March, 2020 |
Profits ( Rs) | (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; Value of Machinery | - | - | - | 1,00,000 | |
Less; Depreciation | - | - | - | (15,000) | (17,000) |
Normal Profit | (90,000) | 1,10,000 | 1,70,000 | 1,50,000 | 1,60,000 |
Average Profit = (-90,000 + 1,10,000 + 1,70,000 + 1,50,000 + 1,60,000) / 5 = Rs. 5,00,000/5 = Rs. 1,00,000
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill = Rs. 1,00,000 × 3 = Rs. 3,00,000
Weighted Average Profit Method
Question 14
Profits of a firm for the year ended 31st March for the last five years were:
Year Ended | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 | 31st March, 2020 |
Profits ( Rs) | 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, 2016, 2017, 2018, 2019 and 2020.
Answer
No. of Year’s Purchases = 3
Weighted Average Profit = Total Weighted of Profit / Total Weight
Weighted Average Profit = Rs. 3,48,000/ 15 = Rs. 23,200
Goodwill= Weighted Average Profit × No. of Year’s Purchases
Goodwill = Rs. 23,200 × 3 = Rs. 69,600
Working Note:
Calculation of weighted Profit.
Year Ended | Profit | Weight | Weighted Profit |
31st March, 2016 | 20,000 | 1 | 20,000 |
31st March, 2017 | 24,000 | 2 | 48,000 |
31st March, 2018 | 30,000 | 3 | 90,000 |
31st March, 2019 | 25,000 | 4 | 1,00,000 |
31st March, 2020 | 18,000 | 5 | 90,000 |
Total | | 15 | 3,48,000 |
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 Rs. 50,000 and Rs. 40,000 respectively. The annual accounts have shown the following net profit before charging partners' salaries:
Year ended 31st March, 2018 − Rs. 1,40,000; 2019 − Rs. 1,01,000 and 2020 − Rs. 1,30,000.
On 1st April, 2020, 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
No. of Year’s Purchases = 4
Weighted Average Profit = Total Weighted of Profit / Total Weight
Weighted Average Profit = Rs. 1,92,000/ 6 = Rs. 32,000
Goodwill= Weighted Average Profit × No. of Year’s Purchases
Goodwill = Rs. 32,000 × 4 = Rs. 1,28,000
Working Note:
Calculation of adjusted profit and weighted Profit.
Year Ended | Profit | Profit after Salary | Weight | Weighted Profit |
31st March, 2018 | 1,40,000 | 50,000 | 1 | 50,000 |
31st March, 2019 | 1,01,000 | 11,000 | 2 | 22,000 |
31st March, 2020 | 1,30,000 | 40,000 | 3 | 1,20,000 |
Total Weighted Profit | | | 6 | 1,92,000 |
Weighted Average Profit Method when Past Adjustments Are Made
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: 2017 − Rs. 25,000; 2018 − Rs. 27,000; 2019 − Rs. 46,900 and 2020 − Rs. 53,810. The weights assigned to each year are: 2017 − 1; 2018 − 2; 2019 − 3; 2020 − 4. You are supplied the following information:
(i) On 1st April, 2017, a major plant repair was undertaken for Rs. 10,000 which was charged to revenue. The said sum is to be capitilised for goodwill calculation subject to adjustment of depreciation of 10% on Reducing Balance Method.
(ii) The Closing Stock for the years ended 31st March, 2018 and 2019 were overvalued by Rs. 1,000 and Rs. 2,000 respectively.
(iii) To cover management cost an annual charge of Rs. 5,000 should be made for the purpose of goodwill valuation.
Answer
No. of Year’s Purchases = 3
Weighted Average Profit = Total Weighted of Profit / Total Weight
Weighted Average Profit = = Rs. 3,89,794/ 10 = Rs. 38,979
Goodwill= Weighted Average Profit × No. of Year’s Purchases
Goodwill = Rs. 38,979 × 4 = Rs. 1,16,938
Working Note:
1. Calculation of Normal Business Profit.
Year Ended | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 | 31st March, 2020 |
Profits ( Rs) | 25,000 | 27,000 | 46,900 | 53,810 |
Less; Capitalised Expenses | 10,000 | - | - | - |
Less; Depreciation | (1,000) | (900) | (810) | (729) |
Less; Overvaluation of Closing Stock | - | (1,000) | (2,000) | - |
Add; Overvaluation of Opening Stock | - | | 1,000 | 2,000 |
Less; Annual Charges | (5,000) | (5,000) | (5,000) | (5,000) |
Normal Profit | 29,000 | 20,100 | 40,090 | 50,081 |
2. Calculation of Weighted Profit.
Year Ended | Profit | Weight | Weighted Profit |
31st March, 2017 | 29,000 | 1 | 29,000 |
31st March, 2018 | 20,100 | 2 | 40,200 |
31st March, 2019 | 40,090 | 3 | 1,20,270 |
31st March, 2020 | 50,081 | 4 | 2,00,324 |
Total Weighted Profit | | 10 | 3,89,794 |
Note: If the date of first adjustment is taken as On 1st April, 2018, Value of goodwill would be Rs. 1,20,000
Super Profit Method
Question 17
The capital of the firm of Anuj and Benu is Rs. 10,00,000 and the market rate of interest is 15%. Annual salary to the partners is Rs. 60,000 each. The profit for the last three years were Rs. 3,00,000, Rs. 3,60,000 and Rs. 4,20,000. Goodwill of the firm is to be valued on the basis of two years' purchase of last three years average super profits.
Calculate the goodwill of the firm,
Answer
No. of Year’s Purchases = 2
Average Profit = Sum Total Profit of past given years / Number of Years
Average Profit = (3,00,000 + 3,60,000 + 4,20,000) / 3 =Rs. 10,80,000/3 =Rs. 3,60,000
Adjusted Average Profit = Rs. 3,60,000 – 1,20,000 (Salary) = Rs. 2,40,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 10,00,000 x 15% = Rs. 1,50,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 2,40,000 – 1,50,000 = Rs. 90,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 90,000 × 2 = Rs. 1,80,000
Question 18
Gupta and Bose had a firm in which they had invested Rs. 50,000. On an average, the profits were Rs. 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
No. of Year’s Purchases = 4
Average Profit = Rs. 16,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 50,000 x 15% = Rs. 7,500
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 16,000 – 7,500 = Rs. 8,500
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 8,500 × 4 = Rs. 34,000
Question 19
The total capital of the firm of Sakshi, Mehak and Megha is Rs. 1,00,000 and the market rate of interest is 15%. The net profits for the last 3 years were Rs. 30,000; Rs. 36,000 and Rs. 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
No. of Year’s Purchases = 2
Average Profit = Sum Total Profit of past given years / Number of Years
Average Profit = (30,000 + 36,000 + 42,000) / 3 =Rs. 1,08,000/3 =Rs. 36,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 1,00,000 x 15% = Rs. 15,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 36,000 – 15,000 = Rs. 21,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 21,000 × 2 = Rs. 42,000
Question 20
Rakesh and Ashok earned a profit of Rs. 5,000. They employed capital of Rs. 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
No. of Year’s Purchases = 3
Average Profit = Rs. 5,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 25,000 x 15% = Rs. 3,750
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 5,000 – 3,750 = Rs. 1,250
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 1,250 × 3 = Rs. 3,750
Question 21
Average net profit expected in future by XYZ firm is Rs. 36,000 per year. Average capital employed in the business by the firm is Rs. 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 Rs. 6,000 p.a. Calculate the value of goodwill on the basis of two years' purchase of super profit.
Answer
No. of Year’s Purchases = 2
Average Profit = Rs. 36,000
Adjusted Average Profit = Rs. 36,000 – 6,000 (Salary) = Rs. 30,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 2,00,000 x 10% = Rs. 20,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 30,000 – 20,000 = Rs. 10,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 10,000 × 2 = Rs. 20,000
Question 22
A partnership firm earned net profits during the last three years ended 31st March, as follows: 2018 − Rs. 17,000; 2019 − Rs. 20,000; 2020 − Rs. 23,000.
The capital investment in the firm throughout the above-mentioned period has been Rs. 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
No. of Year’s Purchases = 2
Average Profit = Sum Total Profit of past given years / Number of Years
Average Profit = (17,000 + 20,000 + 23,000) / 3 =Rs. 60,000/3 =Rs. 20,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 80,000 x 15% = Rs. 12,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 20,000 – 12,000 = Rs. 8,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 8,000 × 2 = Rs. 16,000
Question 23
A business earned an average profit of Rs. 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 Rs. 22,00,000 and Rs. 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at212 years' purchase of super profits.
Answer
No. of Year’s Purchases = 2.5
Average Profit = Rs. 8,00,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = Rs. 22,00,000 – 5,60,000 = 16,40,000
Normal Profit = 16,40,000 x 10% = Rs. 1,64,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 8,00,000 – 1,64,000 = Rs. 6,36,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 6,36,000 × 2.5 = Rs. 15,90,000
Question 24
Capital of the firm of Sharma and Verma is Rs. 2,00,000 and the market rate of interest is 15%. Annual salary to partners is Rs. 12,000 each. The profits for the last three years were Rs. 60,000; Rs. 72,000 and Rs. 84,000. Goodwill is to be valued at 2 years' purchase of last 3 years' average super profit.
Calculate goodwill of the firm.
Answer
No. of Year’s Purchases = 2
Average Profit = Rs. 1,44,000/3 =Rs. 48,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 2,00,000 x 15% = Rs. 30,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 48,000 – 30,000 = Rs. 18,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 18,000 × 2 = Rs. 36,000
Working Note:
Calculation of Normal Business Profit.
Year | Profits(Rs) | (-) Salary | Normal Profit |
1st Year | 60,000 | (24,000) | 36,000 |
2nd Year | 72,000 | (24,000) | 48,000 |
3rd Year | 84,000 | (24,000) | 60,000 |
Total Profit | 2,16,000 | | 1,44,000 |
Question 25
On 1st April, 2020, an existing firm had assets of Rs. 75,000 including cash of Rs. 5,000. Its creditors amounted to Rs. 5,000 on that date. The firm had a Reserve of Rs. 10,000 while Partners' Capital Accounts showed a balance of Rs. 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at Rs. 24,000 at four years' purchase of super profit, find average profit per year of the existing firm.
Answer
No. of Year’s Purchases = 4
Average Profit = Rs. 8,00,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = Rs. 60,000 + 10,000 = 70,000
Normal Profit = 70,000 x 20% = Rs. 14,000
1. Goodwill= Super Profit × No. of Year’s Purchases
Super Profit = Goodwill / No. of Year’s Purchases
= Rs. 24,000 / 4 = Rs. 6,000
2. Super Profit = Actual Average Profit - Normal Profit
Actual Average Profit = Super Profit + Normal Profit
= 6,000 + 14,000 = Rs. 20,000
Question 26
Average profit of the firm during last few year is Rs. 2,00,000. normal rate of return in a similar business is 10%. if goodwill of the firm is Rs. 2,50,000 at 4 years’ purchase of super profit, find capital employed by the firm.
Answer
No. of Year’s Purchases = 4
1. Goodwill= Super Profit × No. of Year’s Purchases
Super Profit = Goodwill / No. of Year’s Purchases
= Rs. 2,50,000 / 4 = Rs. 62,500
2. Super Profit = Actual Average Profit - Normal Profit
Normal Profit = Actual Average Profit - Super Profit
= 2,00,000 + 62,500 = Rs.1,37,800
3. Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = Normal Profit x Reciprocal Rate of Return
= 1,37,500 x 100/100 = 13,75,000
Super Profit Method when Past Adjustments Are Made
Question 27
Average profit earned by a firm is Rs. 1,00,000 which includes undervaluation of stock of Rs. 40,000 on an average basis. The capital invested in the business is Rs. 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
No. of Year’s Purchases = 5
Average Profit = Rs. 1,00,000
Adjusted Average Profit = 1,00,000 + 40,000 = Rs. 1,40,000 (Adjustment of Stock)
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 6,30,000 x 5 % = Rs. 31,500
Super Profit = Actual Average Profit - Normal Profit
Super Profit =1,40,000 – 31,500 = Rs. 1,08,500
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 1,08,500 × 5 = Rs. 5,42,000
Question 28
Average profit earned by a firm is Rs. 7,50,000 which includes overvaluation of stock of Rs. 30,000 on an average basis. The capital invested in the business is Rs. 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
No. of Year’s Purchases = 3
Average Profit = Rs. 7,50,000
Adjusted Average Profit = 7,50,000 - 30,000 = Rs. 7,20,000 (Adjustment of Stock)
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 42,00,000 x 15 % = Rs. 6,30,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit =7,20,000 – 6,30,000 = Rs. 90,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 90,000 × 3 = Rs. 2,70,000
Question 29
Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st April, 2020. 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 (Rs.) | |
31st March, 2016 | 1,50,000 | |
31st March, 2017 | 1,80,000 | |
31st March, 2018 | 1,00,000 | (Including abnormal loss of Rs. 1,00,000) |
31st March, 2019 | 2,60,000 | (Including abnormal gain (profit) of Rs. 40,000) |
31st March, 2020 | 2,40,000 |
The firm has total assets of Rs. 20,00,000 and Outside Liabilities of Rs. 5,00,000 as on that date. Normal Rate of Return in similar business is 10%.
Calculate value of goodwill.
Answer
No. of Year’s Purchases = 3
Adjusted Average Profit = 9,90,000 / 5 = Rs. 1,98,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = 20,00,000 – 5,00,000 = Rs. 15,00,000
Normal Profit = 15,00,000 x 10 % = Rs. 1,50,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit =1,98,000 – 1,50,000 = Rs. 48,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 48,000 × 3 = Rs. 1,44,000
Working Note:
Calculation of Adjusted Profit.
Year Ended | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 | 31st March, 2020 | Total |
Profits ( Rs) | 1,50,000 | 1,80,000 | 1,00,000 | 2,60,000 | 2,40,000 | 9,30,000 |
Add; Abnormal Loss | - | - | 1,00,000 | - | - | |
Less; Abnormal Profit | - | - | - | (40,000) | | |
Adjusted Profit | 1,50,000 | 1,80,000 | 2,00,000 | 2,20,000 | 2,40,000 | 9,90,000 |
Capitalisation Method
Question 30
From the following information, calculate value of goodwill of the firm by applying Capitalisation Method:
Total Capital of the firm Rs. 16,00,000.
Normal rate of return 10%.
Profit for the year Rs. 2,00,000.
Answer
Profit of the = 2,00,000
Capitilised Value of Firm = Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 2,00,000 x 100/10 = 20,00,000
Net Assets = All Assets – Outside Liabilities = Capital Employed
Total Capital = Rs. 16,00,000
Goodwill = Capitilised Value of the Firm – Total Capital
Goodwill = 20,00,000 – 16,00,000 = Rs. 4,00,000
Question 31
A firm earns average profit of Rs. 3,00,000 during the last few years. The Normal Rate of Return of the industry is 15%. The assets of the business were Rs. 17,00,000 and its liabilities were Rs. 2,00,000.
Calculate the goodwill of the firm by Capitalisation of Average Profit Method.
Answer
Average Normal Profit = 3,00,000
Capitilised Value of Firm = Average Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 3,00,000 x 100/15 = Rs. 20,00,000
Net Assets = All Assets – Outside Liabilities
Net Assets = 17,00,000 – 2,00,000 = Rs. 15,00,000
Goodwill = Capitilised Value of the Firm – Net Assets
Goodwill = 20,00,000 – 15,00,000 = Rs. 5,00,000
Question 32
From the following information, calculate value of goodwill of the firm by applying capitalization method;
Capital of the firm Rs. 24,00,000
Normal rate of return 10%, profit for the year Rs. 3,00,000
Answer
Normal Profit = 3,00,000
Capitilised Value of Firm = Average Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 3,00,000 x 100/10 = Rs. 30,00,000
Capital of the Firm= Rs. 24,00,000
Goodwill = Capitilised Value of the Firm – Capital of the Firm
Goodwill = 30,00,000 – 24,00,000 = Rs. 6,00,000
Question 33
A business has earned average profit of Rs. 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 Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%.
Answer
Normal Profit = 1,00,000
Capitilised Value of Firm = Average Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 1,00,000 x 100/10 = Rs. 10,00,000
Net Assets = All Assets – Outside Liabilities
Net Assets = 10,00,000 – 1,80,000 = Rs. 8,20,000
Goodwill = Capitilised Value of the Firm – Capital of the Firm
Goodwill = 10,00,000 – 8,20,000 = Rs. 1,80,000
Question 34
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: 2020 − Rs. 54,000; 2019 − Rs. 42,000; 2018 − Rs. 39,000; 2017 − Rs. 67,000 and 2016 − Rs. 59,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm Rs. 2,00,000.
Answer
Average Profit = (54,000 + 42,000 + 39,000 + 67,000 + 59,000)/5 = Rs. 2,61,000/5 = Rs. 52,200
Capitilised Value of Firm = Average Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 52,200 x 100/20 = Rs. 2,61,000
Net Assets = 2,00,000
Goodwill = Capitilised Value of the Firm – Capital of the Firm
Goodwill = 2,61,000 – 2,00,000 = Rs. 61,000
Question 35
A business has earned average profit of Rs. 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 Rs. 40,00,000 and its external liabilities Rs. 7,20,000.
Answer
(i) Calculation of Goodwill by Capitalisation Method
Average Profit = Rs. 4,00,000
Capitilised Value of Firm = Average Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 4,00,000 x 100/10 = Rs. 40,00,000
Net Assets = All Assets – Outside Liabilities
Net Assets = 40,00,000 – 7,20,000 = Rs. 32,80,000
Goodwill = Capitilised Value of the Firm – Capital of the Firm
Goodwill = 40,00,000 – 32,80,000 = Rs. 7,20,000
(ii) Calculation of Goodwill by Super Profit Method
No. of Year’s Purchases = 3
Average Profit = Rs. 4,00,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = 40,00,000 – 7,20,000 = Rs. 32,80,000
Normal Profit = Rs. 32,80,000 x 10% = Rs. 3,28,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 4,00,000 – 3,28,000 = Rs. 72,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 72,000 × 3= Rs. 2,16,000
Question 36
A firm earns profit of Rs. 5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsider’s liabilities as on the date of goodwill are Rs. 55,00,000 and Rs. 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.
Answer
1. Calculation of Goodwill by Capitalisation of Average Profit Method
Average Profit = Rs. 5,00,000
Capitilised Value of Firm = Average Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 5,00,000 x 100/10 = Rs. 50,00,000
Net Assets = All Assets – Outside Liabilities
Net Assets = 55,00,000 – 14,00,000 = Rs. 41,00,000
Goodwill = Capitilised Value of the Firm – Capital of the Firm
Goodwill = 50,00,000 – 41,00,000 = Rs. 9,00,000
2. Calculation of Goodwill by Capitalisation of Super Profit Method
Average Profit = Rs. 5,00,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = 55,00,000 – 14,00,000 = Rs. 41,00,000
Normal Profit = Rs. 41,00,000 x 10% = Rs. 4,10,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 5,00,000 – 4,10,000 = Rs. 90,000
Goodwill= Capitilised Value of Super Profit
Goodwill = Rs. 90,000 × 100/10= Rs. 9,00,000
Question 37
On 1st April, 2018, a firm had assets of Rs. 1,00,000 excluding stock of Rs. 20,000. The current liabilities were Rs. 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 Rs. 60,000 at four years' purchase of super profit, find the actual profits of the firm.
Answer
No. of Year’s Purchases = 4
Average Profit = Rs. 4,00,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = 1,00,000 + 20,000 – 10,000 = Rs. 1,10,000
Normal Profit = Rs. 1,10,000 x 8% = Rs. 8,800
1. Goodwill= Super Profit × No. of Year’s Purchases
Super Profit = Goodwill / No. of Year’s Purchases
Super Profit = 60,000 / 4 = Rs. 15,000
2. Super Profit = Actual Average Profit - Normal Profit
Actual Average Profit = Super Profit + Normal Profit
Actual Average Profit = 15,000 + 8,800 = 23,800
Capitalisation of Super Profit Method
Question 38
Raja Brothers earn an average profit of Rs. 30,000 with a capital or Rs. 2,00,000. The normal rate of return in the business is 10%. Using Capitalisation of supper profit method workout the value of the goodwill of the firm.
Answer
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = Rs. 2,00,000 x 10% = Rs. 20,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 30,000 – 20,000 = Rs. 10,000
Goodwill= Capitilised Value of Super Profit
Goodwill = Rs. 10,000 × 100/10= Rs. 1,00,000
Question 39
Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000; Rajani Rs. 2,00,000. During the year ened 31st March, 2020, the firm earned a profit of Rs. 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
Total Capital = 3,00,000 + 2,00,000 = Rs. 5,00,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = Rs. 5,00,000 x 20% = Rs. 1,00,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 1,50,000 – 1,00,000 = Rs. 50,000
Goodwill= Capitilised Value of Super Profit
Goodwill = Rs. 50,000 × 100/20= Rs. 2,50,000
Question 40
Average profit of GS & Co. is Rs. 50,000 per year. Average capital employed in the business is Rs. 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) Calculation of Goodwill by Super Profit Method
No. of Year’s Purchases = 3
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = Rs. 3,00,000 x 10% = Rs. 30,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 50,000 – 30,000 = Rs. 20,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 20,000 × 3= Rs. 60,000
(ii) Calculation of Goodwill by Capitalisation of Super Profit Method
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = Rs. 3,00,000 x 10% = Rs. 30,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 50,000 – 30,000 = Rs. 20,000
Goodwill= Capitilised Value of Super Profit
Goodwill = Rs. 20,000 × 100/10= Rs. 2,00,000
Question 41
A business has earned average profit of Rs. 8,00,000 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 Rs. 80,00,000 and its external liabilities Rs. 14,40,000.
Answer
(i) Calculation of Goodwill by Capitalisation of Super Profit Method
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = 80,00,000 – 14,40,000 = Rs. 65,60,000
Normal Profit = Rs. 65,60,000 x 10% = Rs. 6,56,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 8,00,000 – 6,56,000= Rs. 1,44,000
Goodwill= Capitilised Value of Super Profit
Goodwill = Rs. 1,44,000 × 100/10= Rs. 14,40,000
(ii) Calculation of Goodwill by Super Profit Method
No. of Year’s Purchases = 3
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = 80,00,000 – 14,40,000 = Rs. 65,60,000
Normal Profit = Rs. 65,60,000 x 10% = Rs. 6,56,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 8,00,000 – 6,56,000= Rs. 1,44,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 1,44,000 × 3= Rs. 4,32,000
Question 42
Ajeet and Baljeet are partners in a firm. Their capitals are Rs. 9,00,000 and Rs. 6,00,000 respectively. During the year ended 31st March, 2019 the firm earned a profit of Rs. 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
(i) Calculation of Goodwill by Capitalisation Method
Profit = Rs. 4,50,000
Capitilised Value of Firm = Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 4,50,000 x 100/20 = Rs. 22,50,000
Net Capital Employed = 9,00,000 + 6,00,000 = Rs. 15,00,000
Goodwill = Capitilised Value of the Firm – Capital of the Firm
Goodwill = 22,50,000 – 15,00,000 = Rs. 7,50,000
(ii) Calculation of Goodwill by Super Profit Method
No. of Year’s Purchases = 2
Profit = Rs. 4,50,000
Normal Profit = Average Capital Employed x Normal Rate of Return
Capital Employed = 9,00,000 + 6,00,000 = Rs. 15,00,000
Normal Profit = Rs. 15,00,000 x 20% = Rs. 3,00,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 4,50,000 – 3,00,000 = Rs. 1,50,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 1,50,000 × 2 = Rs. 3,00,000
Question 43
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 Rs. 6,00,000.
(b) Net Profit/(Loss) of the firm for the last three years ended are:
31st March, 2020 − Rs. 2,00,000, 31st March, 2019 − Rs. 1,80,000, and 31st March, 2018 − Rs. 1,60,000.
(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of Rs. 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 Rs. 7,00,000 whereas Partners' Capital is Rs. 6,00,000 and Outside Liabilities Rs. 1,00,000.
Answer
(i) At Three Years' Purchase of Average Profit.
Number of Years’ Purchase = 3
Adjusted Average profit = Rs. 80,000 (Working Note 2)
Goodwill= Average Profit × No. of Year’s Purchases
Goodwill= Rs. 80,000 × 3 = Rs. 2,40,000
(ii) At Three Years' Purchase of Super Profit.
No. of Year’s Purchases = 3
Adjusted Average profit = Rs. 80,000 (Working Note 2)
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 6,00,000 x 10% = Rs. 60,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 80,000 – 60,000 = Rs. 20,000
Goodwill= Super Profit × No. of Year’s Purchases
Goodwill = Rs. 20,000 × 3 = Rs. 60,000
(iii) On the basis of Capitalisation of Super Profit.
No. of Year’s Purchases = 3
Adjusted Average profit = Rs. 80,000 (Working Note 2)
Normal Profit = Average Capital Employed x Normal Rate of Return
Normal Profit = 6,00,000 x 10% = Rs. 60,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 80,000 – 60,000 = Rs. 20,000
Goodwill= Capitilised Value of Super Profit
Goodwill = Rs. 20,000 × 100/10= Rs. 2,00,000
(iv) On the basis of Capitalisation of Average profit.
Adjusted Average profit = Rs. 80,000 (Working Note 2)
Capitilised Value of Firm = Profit x Reciprocal of Normal Rate of Return
Capitilised Value of Firm = 80,000 x 100/10 = 8,00,000
Net Assets = All Assets – Outside Liabilities
Net Assets = 7,00,000 – 1,00,000 = Rs. 6,00,000
Goodwill = Capitilised Value of the Firm – Total Capital
Goodwill = 8,00,000 –6,00,000 = Rs. 2,00,000
Working Note:
1. Calculation of Normal Profit.
Year | Profits(Rs) | (-) Remuneration | Normal Profit |
1st Year | 2,00,000 | (1,00,000) | 1,00,000 |
2nd Year | 1,80,000 | (1,00,000) | 80,000 |
3rd Year | 1,60,000 | (1,00,000) | 60,000 |
Total Profit | 5,40,000 | | 2,40,000 |
2. Calculation of Normal Profit.
(1,00,000 + 80,000 + 60,000) /3 = 2,40,000 / 3 = 80,000
More XII Accountancy Study Materials @
https://pratapnaikresources.wordpress.com/
Comments
Post a Comment