PRACTICAL QUESTIONS
(Question No. 1 to 16 are strictly in the serial order of Illustrations)
Valuation of Goodwill
Average Profit Method
Q.1. The goodwill of a firm is valued at 4 years' purchase of average profits of
last five years. The profits of the last five years were
Year Profit ()
2017-18 2,00,000
2018-19 (3,00,000)
2019-20 4,50,000 (including an abnormal gain of 750,000)
2020-21 3,50,000 (after charging an abnormal loss of 790,000)
2021-22 2,60,000
Calculate the amount of goodwill.
[Ans. Goodwill R8,00,000]
Q. 2. X purchasedthe business of Y from 1st April, 2019. For this purpose
goodwill is to be valued at 100% of the average annual profits of the last four years.
The profits shown by Y's business for the last four years were
Year ended
31st March, 2016 Profit 1,00,000 (after debiting loss of stock by fire
T50,000)
2017 Loss 1,50,000 (includes voluntary retirement
compensation paid T80,000)
2018 Profit 1,50,000
2019 Profit 2,00,000
Verification of books of accounts revealed the following:
a machine got destroyed in accident
i) During the year ended 3 1st March, 2017,
Profit & Loss Account.
and F60,000 was written off as loss in
each were purchased and
ii) On 1st July 2017, Two Computers costing 40,000
Account on which depreciation is to be
were debited to Travelling Expenses
Method.
charged @ 10% p.a. on Straight Line
Calculate the value of goodwill.
Ans. Goodwill 1,39,000.]
and for 2019 R1,92,000.
Hint. Profit for the year ended 31st March 2018 72,24,000
ratio of
B and firm sharing profits and losses in the
Care partners in a
Q.3. A, for 1/4th share on lst April, 2022. For
21. They decide to take D into partnership
the average annual profíts of the
nis
purpose, goodwill is to be valued at 3 times for goodwill
previous four or five whichever is higher. The agreed profits
years
2.22 GOODWILL: CONCEPT AND VALUATION
purpose of the past five years are as follows
Year ending on 31st March 2018 1,30,000
Year ending on 31st March 2019 1,20,000
Year ending on 31st March 2020 1,50,000
Year ending on 31st March 2021 1,10,000
Year ending on 31st March 2022 2,00,000
Calculate the value of Goodwill.
[Ans. Goodwill 74,35,000]
Q. 4. 4, B and C are partners sharing profits and losses equally. They agree to
admit D for equal share. For this purpose goodwill is to be valued at 3 year's purchase
of averageprofits of last 5 years which were as follows
Year ending on 31st March 2018 60,000 (Profit)
Year ending on 31st March 2019 1,50,000(Profit)
Year ending on 31st March 2020 20,000 (Loss)
Year ending on 31st March 2021 2,00,000 (Profit)
Year ending on 31st March 2022 1,85,000 (Profit)
On lst October, 2021 a computer costing 40,000 was purchased and debited to
office expenses account on which depreciation is to be charged @25% p.a. Calculate
the value of goodwil.
Ans. Goodwill 73,66,000.]
Hint: Adjusted profit of 2017 will be: R1,85,000 + 40,000 - Depreciation 5,000
2,20,000.
Q.5. The profits earned by a firm during the last four years were as follows:
Year ended 31st March Profits )
2019 80,000
2020 1,00,000
2021 1,10,000
2022 1,50,000
Calculate the value of goodwill on the basis of three year's purchase of weighted
average profits. Weights to be used are 1,2,3 and 4 respectively to the profits for 2019,
2020, 2021 and 2022.
[Ans. Goodwill 73,63,000.]
Q.6. Following information is available about the business of a firm
() Profits: In 2020, R40,000; In 2021, 50,000; In 2022, 760,000,
(ii) Non-
recurring income of T1,000 is included in the profits of 2021, (iit) Profits of 2020
been reduced by <6,000 because goods were have.
destroyed by fire, (iv) Goods have not
been insured but it is thought to insure them in future. The insurance premium is
estimated at 7400 per year, (v) Reasonable remuneration of the proprietor of business
is 76,000 per year, but it has not been taken into account for
calculation of above
mentioned profits, (vi) Profíts of 2022 include 5,000 income on investment.
GOODWILL: CONCEPT AND VALUATION 2.23
Goodwill is agreed to be valued at two years' purchase of the weighted average
profits of the past three years. The appropriate weights to be used are :
2020-1; 2021-2; 2022--3.
[Ans. Value of Goodwill F90,200.1
o. 7.Calculate the value of goodwill on the basis of three year's purchase of the
weighted average profits of the last five years. Profits to be weighted 1, 2, 3, 4 and 5,
the greatest weightag to be given to last year. Profits of the last five years were:
Year ended
31st March, 2015: Profit 80,000
2016 Profit 1,05,000 (after considering abnormal loss
of R41,500)
2017: Loss 20,000 (after considering abnormal gain
of 40,000)
2018 Profit 1,80,000
9
2019 Profit 2,00,000
Books of Accounts of the firm revealed that
() Closing Stock as on 31st March, 2015 was overvalued by R40,000.
(i) Repairs to Machinery F60,000 were wrongly debited to Machinery Account
on 1st July, 2017. Depreciation was charged on Machinery @ 20% p.a. on
diminishing balance method.
[Ans. Value of Goodwill T3,60,000.]
Hint Weighted Profit for the year ended 31st March 2018 75,16,000 and 2019
710,51,000.
SuperProfit Method
four years follows:
Q.8. A partnership firm earned net profits during the last
as
Year
1 56,000
2 64,000
60,000
4 62,000
The capital investment in the firm throughout the above mentioned period has
15% is considered to be a fair
been3,00,000. Having regard to the risk involved,
return on the capital.
of
Calculate the value of goodwill on the basis of 3 years' purchase average super
profits earned during the above-mentioned four years.
[Ans. 746,500.]
and the market rate
Q.9.The capital of the firm of Anuj and Benu is 10,00,000
is F60,000 each. The profit for the last
Of interest is 15%. Annual salary to the partners
4,20,000. Goodwill of the firm is to be
nree years were 2,80,000, 3,80,000 and of last three years average super profits.
on the basis of two years purchase
valued (C.B.S.E. 2019, MP.)
Calculate the goodwill of the firm.
[Ans. Goodwill R1,80,000]
2.24 GOODWILL: CONCEPT AND VALUATION
information:
Q. 10. Find out the capital employed from the following
12%
Normal rate of return :
Profits: 2017-18 80,000
2018-19 1,30,000
2019-20 71,56,000
Goodwill valued at 3 years purchase ofSuper Profits 1,50,000
Ans. Capital Employed 76,00,000]
Q. 11. A and B are partners. They admit C forth share in profits. For this purpose
of profits.
goodwill is to be valued at three year's purchase super
Following information is provided to you :
A's Capital 5,00,000
4,00,000
B's Capital
General Reserve 1,50,000
Profit& Loss A/c (Cr.) 30,000
Sundry Assets 12,00,000
The normal rate of return is 15% p.a. Average Profits are 2,00,000 per year. You
are required to calculate C's share of goodwill.
Ans. C's share of goodwill 28,500.]
Hint. Sundry Assets will be ignored.
Q. 12. The net assets of a firm as on March 31, 2022 were R4,00,000. Ifthe normal
rate of return is 20% and the goodwill of the firm is valued at 1,25,000 at 5 year's
purchase of super profits, find the average profits of the firm.
Ans. Average Profit 71,05,000]
Q. 13. On April Ist 2022, an existing firm had assets of 75,00,000 including cash
of 20,000. The firm had a General Reserve of F90,000, partner's capital accounts
showed a balance of 73,80,000 and creditors amounted to 30,000. If the normal rate
of return is 20%and the goodwill ofthe firm is valued at T64,000 at 4 year's purchase
of super profit, find the average profits of the firm.
[Ans. 1,10,000]
Capitalisation Method
Q.14. The average profits of a firm is 48,000. The total assets of the firm are
T8,00,000. Value of other liabilities is 5,00,000. Average rate of return in the same
business is 12%.
Calculate goodwill from capitalisation of
average profits method.
Ans. R1,00,000.]
Hint: Capital Employed =Assets Liabilities.
Q.15. Anupma, Purnima and Ruchika are
partners in a business. Balances in their
Capital and Current Accounts as on 31st March, 2019 were
GOODWILL: CONCEPT AND VALUATION 2.25
Capital Account Current Account
) )
Anupma 6,00,000 60,000 (Dr.)
Purnima 5,00,000 30,009 (Dr.)
Ruchika 5,00,000 10,000 (Cr.)
The firm earned an average profit of R2,40,000. Ifthe normal rate of return is 12%,
find the value of goodwill by Capitalisation of Average Profit Method.
[Ans. Value of Goodwill 4,80,000]
Q. 16. Calculate the value of goodwill according to capitalisation of Super Profits
Method in the previous Q. 14.
[Ans. 1,00,000]
Q. 17. The following information relates to a partnership firm:
(a) Profits/Losses for the last six years:
1st year 20,000 Profit 4th year T60,000 Profit
2nd year T60,000 Profit 5th year T50,000 Profit
3rd year T10,000 Loss 6th year T72,000 Profit
(b) Average Capital Employed is 2,00,000.
(c) Rate of normal profit is 15%.
Find out the value of goodwill on the basis of:
() Four years' purchase of average profits.
(ii) Four years' purchase of super profits.
(iin Capitalisation ofsuper profits.
[Ans. ()On the basis of average profits T1,68,000
(ii) On the basis of super profits 48,000
(iii) On the basis of capitalisation of super profits 80,000.]
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ADDITIONAL QUESTIONS
Valuation of Goodwill
Q.18. Calculate the value of goodwill as on 1st April, 2022, on the basis of 2
year's purchase of the average profits of the last five years. The profits and losses for
the years ending 31st March were: 2017 80,000; 2018 1,00,000; 2019 Loss
R30,000; 2020 1,70,000; 2021 R1,60,000 and 2022 71,80,000. You are informed that
the profits of the year ending 31st March 2021 included profit on sale ofa fixed asset
amounting 50,000
to and the profits for the year 2022 were effected by a loss due to
fire amounting to F20,000.
[Ans.2,75,000.]
Hint. Profit for the year 2017 will be ignored.
Q. 19. Calculate the value of goodwill at 2 year's purchase of the average profits
ofthe last 3 years. The profit for the first year was50,000, for second year twice the
profit of first year and for the third year one and half times the profit of the second
year.
[Ans. R2,00,000]
GOODWILL: CONCEPT AND VALUATION
2.26
..-.
follows:
Q. 20. A firm earned net profits during the last five years
as
V. 76,000.
I. R7,000; I1. R6,500, III. 78,000; IV. R7,500;
A fair return on capital in the
The capital investment of the firm is 40,000.
market is 12%. Find out the value of goodwill of the business if it is based on three
year's purchase of average super profits of the past five years.
[Ans. Goodwill 6,600.]
In the same business a 10% return
Q.21. A firm earns a profit of T37,000 per year. value of other
Is generally expected. The total assets
of the firm are 4,00,000. The
liabilities is F90,000. Find out the value of goodwill.
[Ans. Goodwill 760,000.]
T15,000. The
of 4,00,000 including cash of
Q. 22. An existing firm had assets
constituted the
balance of 73,00,000 and reserves
partner's capital accounts showed a valued at
rest. If the normal rate of return is 12% and
the goodwill of the firm is
find the average profits of the firm.
50,000 at 2, year's purchase ofsuper profits,
Ans. 68,000]
cash of F15,000. Its
Q.23. An existing firm had assets of 74,00,000 including accounts showed a
creditors amounted to F20,000 on that date. The partner's capital
normal rate of return is
balance of R3,00,000 and reserves amounted to F80,000. Ifthe
at 3 year's purchase of super
10% and the goodwill of the fim is valued at T75,000
profits, find the average profits of the firm.
Ans. F63,000.]
fixed
Q. 24. Yash and Karan were partners in an interior designer firm. Their
balances in
capitals were 76,00,000 and F4,00,000 respectively. There were credit
accounts of F4,00,000 and 75,00,000 respectively. The
firm had a
their current
balance of R1,00,000 in General Reserve. The firm did not have any liability. They
admitted Radhika into partnership for 1/4th share in the profits of the firm. The average
the value of
profits of the firm for the last five years were 5,00,000. Calculate rate of
goodwill of the firm by capitalization of average profits method. The normal
return in the business is 10%. (C.B.S.E. 2020, Lucknow, Kolkata)
Ans. Goodwill R30,00,000.]
Q. 25. A business has earned average profits of R1,00,000 during the last few
ot
years and the normal rate of return in similar business is 10%. Find out the value
Goodwill by:
) Capitalisation of super profit method and
(i) Super profit method if the goodwill is valued at 3 years purchase of super
profit.
The assets of the business were 10,00,000 and its external liabilities
1,80,000.
Ans. () As per capitalisation of Super Profits 1,80,000; () As per Super Profits
54,000.]
G00DWILL:CONCEPT AND VALUATION 2.27
Q. 26. A Partnership firm earned net profits during the last three years as follows:
Years Net Profit ()
2019-20 1,90,000
2020-21 2,20,000
2021-22 2,50,000
The capital employed in the firm throughout the above mentioned period has been
4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on
the capital. The remuneration of all the partners during this period is estimated to be
71,00,000 per annum.
Calculate the value of goodwill on the basis of () two year's purchase of super
profits earned on average basis during the above mentioned three years and (ii) by
capitalisation of average profits method.
[Ans. () As per Super Profits R1,20,000; (ii) As per Capitalisation of Average
Profits 4,00,000.]
Q. 27. Average profit of the firm is 3,00,000. Total assets of the firm are
T24,00,000 whereas Partner's Capital is 20,00,000. If normal rate of return in a
similar business is 12% of the capital employed, what is the value of goodwill by
Capitalisation of Super Profit?
[Ans. Value of Goodwill 5,00,000]
Q. 28. The following information relates to a partnership firm
(a) Sundry Assets of the firm T6,80,000. Outside Liabilities 60,000.
(b) Profits and losses for the past years : Profit 2019 R50,000; Loss 2020
T10,000; Profit 2021 71,64,000 and Profit 2022 1,80,000.
c) The normal rate of return in a similar type of business is 12%.
Calculate the value of goodwill on the basis of:
) Three year's purchase of average profits.
(i) Three year's purchase of super profits.
ii) Capitalisation of average profits, and
(v) Capitalisation of super profits.
Ans. () 2,88,000; (i) T64,800; (ii) 71,80,000 and (iv) R1,80,000]
