Long Calculation Questions

Average Profit Method

Following informations are available about the business of Sudhir Ltd.

Profits: in 2012, 7 40,000; in 2013, 7 50,000; in 2014, 7 60,000. (i) Non-recurring income of 7 4,000
is included in the profit of 2013. (ii) Profits of 2012 have been reduced by 7 6,000 because goods were
destroyed by fire. (iv) Goods have not been insured but it is thought to insure them in future. The
insurance premium is estimated at 7 400 per year. (v) Reasonable remuneration of the proprietor of
business is T6,000 per year, but it has not been taken into account for calculation of above mentioned
of
profits. (vi) Profits of 2014 include 7 5,000 income on investment. Calculate Goodwill on the basis
two years' purchase of the average profit of last three years.
Ans. Goodwill 7 85,200.
2 A.B and Care in partnership, sharing profits in the ratio of 2:2:1.Itwas provided inthe partnership
calculated on the basis
agreement that on the death or retirement of a partner, goodwill should be
retires on 30th June,
of four years purchase of the average net profits for the preceding seven years. C 2014
2014. Calculate the amount of goodwill due to C. Net Profits for the seven years on 30th June,
are: 20087 32,000; 2009 7 40,000; 2010 7 72,000; 2011 7 64,000;
2012 7 32,000; 2013 7 80,000 and
2014 72,000.
Ans. Value of the Firm's Goodwill = 0 = 56,000 x 4 = 7 2,24,000;
7
Amount of Goodwill to C2,24,000 x =T 44,800.

3. PLimited prepare to purchase the business carried on by Shri 'C. Goodwill for this purpose is agreed
tO be valued at three years' purchase of the weighted average profits of the past four years.
The

appropriate weights to be used are:

2010-11-1;2011-12-2;2012-13-3;
The
2013-14 4.
profit for these years are:
Z010-11- 1,01,000; 2011-12T1,24,000; 2012-13-7 1,00,000; and 2013-14- 1,50,000.
 the following matters are revealed:
On scrutiny of the accounts
a
ta) On 1st December, 2012 a major repair was made in respect of the plant incurring7 30,000
amount was charge to revenue. The said sum is agreed to be capitalised for goodwill caleul. which
subject to adjustment of depreciation of 10% per annum on reducing balance method calculation
(b) The closing stock for the year 2011-12 was overvalued by 7 12,000.
(c)In order to cover cost of management, an annual charge of7 24,000 should be made for valua.
goodwill. ation o
Compute the value of Goodwil
Ans. Goodwill = 7 1,09,640 x 3 = * 3,28,920.

Super Profit Method

4. The average net profit adjusted for valuation of goodwill of the B Co. Ltd., amounted to z 2,26 04
The average profits (before adjustment) were 7 2,02,000. Six percent
return. The average tangible' capital employed was 7 13,41,600, but
represented a fair commere
upon valuation, it was val.
at 14,40,000. alued
Assuming seven years' purchase, find out the value of the goodwil1
Ans. Goodwill 7 9,77,515.
Hint: Super Profit 1,39,645; Goodwill =
T 1,39,645 x 7= T 9,77,515.
5. The following particulars are available in respect of the business of X
(a) Average Capital Employed
(b) Trading Results 50,000
2011
Profit
20 12
Profit
12,200
2013 15,000
Loss
2014 2,00
Profit
(c) Market Rate of interest on investment 8%. 21,000
(d) Rate of risk return on capital invested in
2%. (e) Remuneration from
alternative employment of the proprietor (ifnot business
annum 3,600. engaged in business) per
You are required to
compute the value of goodwill on the basis of 3
of the business calculated on
the average profits of the last 4 years' purchase of super profits
Ans. Goodwill 7 8,850. years.
Hint: Super
Profit 7 2,950; Goodwill 7 2,950 x 3 T 8,850.
=
=

6. From the
following information calculate the value of
Weighted): goodwill by super profits method (Simple and
G) Average capital
i) Net trading
employed in the business is T 3,60,000.
profits of the firm for the past three
(ii) Rate of interest years were 7 64,560; T 54,420 and 7
(iv) Fair remuneration
expected from capital having
regard to the risk involved is 12 67,500
Account so far.
to the partners for their service percent p.a.
7,200 per annum, not charged to P. &
(v) Assume
Ans. Value of
goodwill at 3 years' purchase of super
goodwill:G) Normal Super Profit Method 7profit.
35,280; (ii)
7. A Ltd. is to be
absorbed by the B Ltd. and in Weighted Super Profit Method T41,50
necessary, among other things to value the order to decide upon the purchase
goodwill attaching to the business consideration.
Companies agree that the basis of the calculation of A Ltd. The
of goodwill shall be three years'
average annual super profits, the net
adjustment you, as the Accountant making profit being averaged over five purchase or

the years and subject to whate

The profit of the A Ltd. for the last five valuation, consider necessary.
years (before charging
7 45,000; 2013 55,000income-tax@55%
2010 50,000; 2011 7 65,000; 2012 on income) are as
The directors of ALtd. (three in numbers and 2014 fou
will be 75,000.
it is considered that their services appointed to the Board of B Ltd.) on absorption
have been (and will be in
There has never been made any charge the future)
against the profits of A Ltd. for worth 5,000 each ann
capital invested in net tangible assets over the period is such services. The
avere
normal return to expected from the 1,80,000 and it is considered that
the Goodwill of A Ltd. based on the particular type of business carried on by A Ltd. is 10%.
above information. Calcu
Ans. Goodwill 7 4,050,; Super Profit7 1,360.
 Hint: From averageprofit deduet 15,000 salary of Directors and then deduct 56% for Taxation. Average proe
58,000-Director's Remuneration 7 5,000 x 3 or 15,000 = 7 43,000;
43,000
100x b = 7 23,650 Taxation; (7 43,000- 23,650 Tax) = ? 19,350 Actual Average Proht
Following isthe B/Sof Sharad Ltd. for the year ending as at 31st March,2014:
Particulars
EQUITY AND LIABILITIES
Shareholder's funds
Share capital: 1,00,000
10,000 shares oft 10 each
Reserves and surplus:
Statement of P & L 10,000
Profit for 2013-14 80,000
Non-current liabilities:
7T% Debentures 70,000
Current liabilities: 40,000
Trade payables
3,00,000
II. ASSETS
Non-current assets:
Fixed assets
Tangible assets 1,00,000
Building 50,000
Machinery
Current assets: 40,000
Inventories
Trade receivables
50,000
Cash and cash equivalents 60,000
3,00,000
on the
Normal rate of return on average Capital employed is 10%. Find out the value of goodwill
basis of 2 years' purchase of super profit. Buildings are revalued at 7 1,50,000 and machinery
at

7 40,000. All other assets are worth book value.

Ans. Goodwill 7 1,22,000; Super Profit 7 61,000.
R-2013-14 5 80,000 z 5 TH 5 3HA TY HIHT TAT EI
9. Balance Sheet of a Partnership firm is as follows:

Capital: Goodwill 34,000

Buildings 73,000
A 60,000
60.000 1,20,000| Inventories 45,000
B
Trade Receivables 29,000
Trade payables
Creditor 60,000 Bank 19,000
Bills Payable 20,000|
72,00,000 2,00,000

A Company istobe formed to take over thisfirm. For this purchase assets are revalued as under
uildings 7 64,000; Trade receivables 20,000; Inventories 47,000.
Profits of the firm for the past 5 years, before charging anything in respect of the partners, were
20,000; 30,000; 7 36,000; 7 32,000;7 37,000,. Included in these profits were non-reeurring items
averaging 1,500, but from the nature of the business casual non-recurringitems were found to arise
every year and the promotors agreed that 7 1,200 per year should be allowed as profit from this
source. Similar business paid a dividend of 8% per annum on their equity shares and the partners
who would be the directors ofthe company were worth remuneration ofM7 9,000; and N 6,000 p.
Caleulate goodwill on five years' purchase ofsuper pronts tor normal profit only capital employed

should be taken into consideration.10,100; Actual Average Profits R 15,700; Normal Return 7 5,600.
Ans, Goodwill 50,500; Super Profit
 Capitalisation Method
are:
of MLtd. for the last four years respectively
10. Profit
employed is 3,80,000.
1s3,80,000.
Normal
Norm

30,000; 7 40,000; 50,000 and 60,000. Average Capital eu rate of

rat
method
capitalisation method.
return is 10% p.a. Find out i l
by capitalisation
goodwill by
Goodwill 70,000
Ans. Goodwill 70,000 .
Ans. method:
11. From the following information find out goodwill by capitalisation
Profit for the last three years respectively are:
60,000; 7 75,000 and 7 80,000.
of 7 5,000. Average Capital employed :is
The profits of 7 75,000 include non-recurring income
4,00,000. Normal rate of return is 14% p.a.
Ans. Goodwill 1,00,000 .
12. Following is the Balance Sheet of B Ltd. :
Particulars
I. EQUITY AND LIABILITIES:
Shareholders' funds:
Share capital 2,50,000
Current liabilities:
Trade payables 30,000
Bank overdraft 20,000
3,00,000
L ASSETS

Non-current assets:
Fxied assets:
Tangible assets
Building 1,50,000
Furniture 50,000
Current assets
Trade receivables
Cash and cash equivalents
60,000
40,000
3,00,000
The profit of B Ltd. for the last three
Assets are valued as under
years respectively are : 7 50,000; 7 60,000 and 7 70,000.
Building 1,80,000; Furniture 7 40,000; Trade Receivables at book
15% p.a. Use only capital employed and find out goodwill value. Normal rate of return is
Ans. Goodwill 1,30,0007. by capitalisation method.
AnnuityMethod
13. From the
following information, compute the value of
i) Average Capital goodwill as per Annuity Method:
employed 7 4,00,000; ii) Normal
rate of
2013 59,000 and 2014 7
66,000; (iv) Profit for 2013 has been profit
10%; (iii) Profits for 2012T 62,000
of 7 2,000 and profit for 2014 arrived after writing off abnormal
calculated on the basis of annuity of 3 years'non-recurring income of 7 3,000; (v) Goodwill is toloss
includes a
De
Ans. Goodwill 7 64,709.60,
Annuity 2.4868.
7
purchase of super
profits.
Hint:762,000+ 59,000+ 66,000 =71,87,000; 7
7 1,86,000; Average
=

profit 1,87,000+ Abnormal loss 7 2,000-Non-recurring

7 22,000 x 2.4868
=

7 54,709.60.
1,86,000/3 =
7 62,000; Super profit 7 62,000
income 3.0
=
40,000 7 22,0
Goodwillby AllMethods
14. The following information is given: (a)
annuity of 1 for 5 years at 10% is 7 Average capital employed 7 1,00,000; (b) Present ot
3.78; (c) Normal value tn
years are: 15,000; II year 7 16,000; III Year7 rate ofIVprofit is 10%; (d) Net profits for iv
I year 7
Profits included non-recurring 17,000;
profit on an average basis of 7 year7 18,000 and Vyear 7 20,000
recurring tendency. Remuneration of proprietor is 7 800 1,500, out of which 300 had tn
A/c. Find out goodwill (a) as per 5 p.a. which is not
years' purchase charged in Profit and Loss
per capitalisation of profit method. of super profit; (b) as per annuity method, C)
Ans. (a) T26,000; (b)7 19,656; (c) F 52,000.