JAIRAM PUBLIC SCHOOL, SALEM – 8

(CBSE – SENIOR SECONDARY)

STUDENT NAME: CLASS: XII – B1/B2 SUBJECT:

ACCOUNTANCY
ST

CHAPTER – 2 (VOL.2)
ACCOUNTING FOR PARTNERSHIP: VALUATION OF GOODWILL
INTRODUCTION
Goodwill is an intangible asset which is not visible or cannot be touched but can be purchased and traded and is
real. The value of an enterprise’s brand name, solid consumer base, functional consumer associations, good employee
associations and any patents or proprietary technology represent some instances of goodwill.
In other words, goodwill is a firm worth or reputation established over time. In partnership, the valuation of
goodwill is very significant. In this article, we will discuss the meaning of the valuation of goodwill and its different
methods of assessment.
WHAT IS THE VALUATION OF GOODWILL?
The valuation of goodwill is based on the assumption obtained by the valuer. A successful business earns a
reputation in the industry, develops trust with its clients, and has more extensive business links, unlike new companies.
All these points contribute while evaluating the business, and its financial worth that a customer is eager to give is known
as goodwill.
Customers who buy a company looking at its goodwill hopes to gain super-profits. Hence, goodwill applies to
only firms that make super-profits and not to those who earn regular losses or profits.
NEED FOR VALUATION OF GOODWILL
The need for valuation of goodwill arises at the following circumstances:
1. Change in profit sharing ratio among the existing partners.
2. Admission of a partner.
3. Retirement of a partner.
4. Death of a partner.
5. Dissolution of a firm or sale of partnership business.
Amalgamation of firms.
METHODS OF VALUATION OF GOODWILL
Various ways are used in the valuation of goodwill. However, the valuation methods are based on the situation of
an individual company and different practices of the trade. The top three processes of valuation of goodwill are
mentioned below.
⇨ Average Profits Method – This method is divided into two sub-division.
Simple Average – In this process, goodwill evaluation is done by calculating the average profit by the number of
years it is called years purchase. It can be calculated by using the formula.
Goodwill = Average Profit x No. of years’ of purchase.
Weighted Average – Here, last year’s profit is calculated by a specific number of weights. It is used to obtain the
value of goods, which is divided by the total number of weights for determining the average weight profit. This technique
is used when there is a change in profits and giving high importance to the present year’s profit. It is evaluated by using
the formula.
Goodwill = Weighted Average Profit x No. of years’ of purchase,
where Weighted Average Profit = Sum of Profits multiplied by weights/ Sum of weights
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⇨ Super Profits Method – It is a surplus of expected future maintainable profits over normal profits. The two methods
of these methods are.
The Purchase Method by Number of Years – The goodwill is established by evaluating super-profits by a
specific number of the purchase year. It can be estimated by applying the below formula.
Super Profit = Actual or Average profit – Normal Profit

⇨ Capitalization Method – Under this method, goodwill can be evaluated by two methods.
Average Profits Method – In this process, goodwill is measured by subtracting the original capital applied from
the capitalized amount of the average profits based on the average return rate. The formula used is mentioned below.
Capitalised Average profits = Average Profits x (100/average return rate)
Super Profits Method- Here, the super profit is Capitalised, and the goodwill is calculated. The formula applied
is. Goodwill = Super Profits x (100/ Normal Rate of Return)

FACTORS AFFECTING GOODWILL:

 Location of Business – If it is centrally located in a place having more customer traffic, the goodwill tends to be
high.
 Nature of Business – The firm which produces the products having a stable demand is able to earn more profits and
therefore has more goodwill.
 Efficiency of Management – Based on the efficiency of management the productivity as well as the profitability of
an organization be higher and it determines the value of goodwill.
 Time Factor – A business concern running profitably for a longer period will have more goodwill since it is better
known to the customers
 Market Situation – The monopoly or limited competition enables the business to earn more profit, which leads to
higher goodwill.
 Special Advantages – Import licenses, well known foreign collaboration, patents,
trademarks etc. will help to earn more profit which leads to higher goodwill for the firm.

POINTS TO REMEMBER:
Calculation of Normal Business Profit
Profit / Loss of Past year (Before adjustment) (Given):
Add: 1. Abnormal Losses (Eg. Loss by fire, Loss by Theft, etc.) …

2. Loss on Sales of Fixed Asset …

3. Overvaluation of Opening Stock Or …

Undervaluation of Closing Stock
4. Non-recurring Expenses (Expenses are not expected in future) …

5. Capital Expenditure charged as Revenue Expenditure …

(Eg. Purchase of Machinery wrongly debited to Purchase account)
Less: 6. Abnormal Gains (Eg: Gain on Sales of Fixed Assets) …

7. Overvaluation of Closing Stock Or …

Under valuation of Opening Stock
8. Non-Recurring Incomes (Incomes are not expected in future) …

9. Partner’s Remuneration (Value for their services) …

10. Any Future Expenses like: Insurance premium …

Adjusted Profit ….

UNSOLVED NUMERICAL PROBLEMS

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 GOODWILL VALUATION

I. AVERAGE PROFIT METHOD (SIMPLE AVERAGE)

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:
2019 − Rs. 12,000; 2020 − Rs. 18,000;2021 − Rs. 16,000; 2022 − Rs. 14,000.
Calculate amount of Goodwill.

2. Profits for the five years ending on 31st March, are as follows:
Year 2018 − Rs. 4,00,000; Year 2019 − Rs. 3,98,000; Year 2020 − Rs. 4,50,000; Year 2021
− Rs. 4,45,000 and Year 2022 − Rs. 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.

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 2022 2021 2020 2019 2018
Profits ( Rs.) 8,00,000 15,00,000 18,00,000 4,00,000 (Loss) 13,00,000

4. Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take
Deep into partnership from 1st April, 2022 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, 2,88,000;
2022
31st March, 1,81,800;
2021
31st March, 1,87,200;
2020
31st March, 2,53,200.
2019
Calculate the value of goodwill.

5. 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.

6. 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, 2022. 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 2018 2019 2022 2021 2022
Profits ( Rs.) 14,000 15,500 10,000 16,000 15,000
Calculate the value of goodwill.

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 7. Asin and Shreyas were partners sharing profits and losses in the ratio of 2:1. They admitted Shyam as a
partner for 1/5th share in profits. For this purpose, Goodwill of the firm was to be valued on the basis of
three years' purchase of last five years' average profit. Profits for the last five years ended 31st March,
were:

Year 2018 2019 2020 2021 2022

Profit
(Rs.) 1,25,000 1,00,000 1,87,500 (62,500) 1,25,000
Calculate Goodwill of the firm after adjusting the following:
Profit of 2018-19 was calculated after charging 25,000 for abnormal loss of goods by fire.

8. Madhu and Vidhi are partners sharing profits in the ratio of 3:2. They decided to admit Manu as a partner
from 1st April, 2022 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
2022-Profit Rs.30,000 (after debiting loss of stock by fire Rs.40,000).
2021-Loss Rs.80,000 (includes voluntary retirement compensation paid Rs.1,10,000).
2020-Profit Rs.1,10,000 (including a gain (profit) of 30,000 on the sale of fixed assets).
Calculate the value of goodwill.

9. Tarang purchased Jyoti's business with effect from 1st April, 2022. Profits shown by Jyoti's business for the
last three financial years were:
202 : Rs. 1,00,000 (including an abnormal gain of Rs. 12,500).
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202 : Rs. 1,25,000 (after charging an abnormal loss of Rs. 25,000).
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202 : Rs. 1,12,500 (excluding Rs. 12,500 as insurance premium on firm's property- now to be insured).
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Calculate the value of firm's goodwill on the basis of two year's purchase of the average profit of the last three
years.

10. 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 2018 2019 2020 2021 2022
Profit/(Loss) ( Rs.) 1,50,000 3,50,000 5,00,000 7,10,000 (5,90,000)
On 1st April, 2021, 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, 2021 and 2022.
Calculate the value of goodwill after adjusting the above.

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:
2020 - Profit Rs. 50,000 (including profit on sale of assets Rs. 5,000).
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 2021 - Loss Rs. 20,000 (including loss by fire Rs. 30,000).
2022 - 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.

12. Sumit purchased Amit's business on 1st April, 2022. 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, 2019 31st March, 2020 31st March, 2021 31st March, 2022
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,
2019.
(ii) A fixed asset was sold in the year ended 31st March, 2020 and gain (profit) of Rs. 25,000 was
credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2021 assets of the firm were not insured due to oversight. Insurance
premium not paid was Rs. 15,000.
Calculate the value of goodwill.

II. WEIGHTED AVERAGE METHOD

13. Profits of a firm for the year ended 31st March for the last five years were:
Year Ended 31st March, 31st March, 31st March, 31st March, 31st March,
2018 2019 2020 2021 2022
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, 2018, 2019, 2020, 2021 and
2022.

14. 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, 2020 − Rs. 1,40,000; 2021 − Rs. 1,01,000 and 2022 − Rs. 1,30,000.
On 1st April, 2022, 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.

III. SUPER PROFIT METHOD

15. 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 profit. Calculate the goodwill of the firm. (CBSE 2022)

16. Atul and Bipul 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.

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17. 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.

18. 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 at 2½ years' purchase of super profits.

19. 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.

20. A partnership firm earned net profits during the last three years ended 31st March, as follows: 2020
− Rs. 17,000; 2021 − Rs. 20,000; 2022 − 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.

21. On 1st April, 2022, 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.

22. Average profit of a firm during the last few years is Rs.2,00,000 and the normal rate of return in a
similar business is 10%. If the goodwill of the firm is Rs.2,50,000 at 4 years' purchase of super profit, find
the capital employed by the firm.

23. 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.

24. 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 rate of return is 15%.
Calculate goodwill of the firm on the basis of 3 time the super profit.

25. Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st April, 2022. 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, 2018 1,50,000
31st March, 2019 1,80,000
31st March, 2020 1,00,000 (Including abnormal loss of Rs. 1,00,000)
31st March, 2021 2,60,000 (Including abnormal gain (profit) of Rs. 40,000)
31st March, 2022 2,40,000
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 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.

IV. CAPITALIZATION OF AVERAGE PROFIT METHOD

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

27. A firm earns average profit of Rs. 3,00,000 during the last few year Rs. 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 Capitalization of Average Profit Method.

28. The normal rate of return was 20% and the Capitalised value of average profits was Rs.7,50,000.
Calculate goodwill of the firm by Capitalization of average profits method. (CBSE 2020 C)

29. Puneet and Tarun are in restaurant business having credit balances in their fixed Capital Accounts
as Rs.2,50,000 each. They have credit balances in their Current Accounts of Rs.30,000 and Rs.20,000
respectively. The firm does not have any liability. They are regularly earning profits and their average profit
of last 5 years is Rs.1,00,000. if the normal rate of return is 10%, find the value of goodwill
by Capitalization of Average Profit Method.

30. From the following particulars, calculate value of goodwill of a firm by applying Capitalization of
Average Profit Method:
(i) Profits of last five consecutive years ending 31st March are: 2022 − Rs.54,000; 2021 − Rs.42,000; 2020
− Rs.39,000; 2019 − Rs.67,000 and 2018 − Rs.59,000.
(ii) Capitalization rate 20%.
(iii) Net assets of the firm Rs. 2,00,000.

V. CAPITALIZATION OF SUPER PROFIT METHOD

32. 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) Capitalization 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. (Delhi, 2013 C)

33. 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 outsiders' liabilities as on the date of goodwill
are Rs.55,00,000 and Rs.14,00,000 respectively. Calculate value of goodwill according to Capitalization of
Super Profit Method as well as Capitalization of Average Profit Method.

34. 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. (CBSE Sample paper,
2018)

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 35. Average profit of a firm during the last few years is Rs.1,50,000. In similar business, the normal rate of
return is 10% of the capital employed. Calculate the value of goodwill by Capitalization of super profit method
if super profits of the firm are Rs.50,000. (CBSE 2020)

36. Raja Brothers earn an average profit of Rs.30,000 with a capital of Rs.2,00,000. The normal rate of return in
the business is 10%. Using Capitalization of super profit method, workout the value of the goodwill of the firm.
(NCERT)
37. Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000; Rajani Rs. 2,00,000. During
the year 31st March, 2022, the firm earned a profit of Rs. 1,50,000. Calculate the value of goodwill of the firm
by Capitalization of super profit assuming that the normal rate of return is 20%.

38. 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) Capitalization of Super Profit Method.

39. 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) Capitalization 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.

40. 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 Capitalization of Super Profit.
(iv) On the basis of Capitalization 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, 2022 − Rs. 2,00,000, 31st March, 2021 − Rs. 1,80,000, and 31st March, 2020 − 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.

[END OF CHAPTER – GOODWILL]