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CLASS 12

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 Chapter 3

VALUATION OF GOODWILL

1. Define Goodwill.

Ans: Goodwill represents the value of a firm’s brand name, loyal

customer base, reputation for high quality products and other factors that
provide it with more earning power. Over a period of time, a well-
established business develops an advantage of good name, reputation
and wide business connections. This helps the business to earn more
profits as compared to a newly set up business. In accounting, the
monetary value of such advantage is known as ‘Goodwill’.

In the words of Lord Eldon, “Goodwill is nothing more than the probability
that the old customers will resort to the old place”.

2. Explain the nature of Goodwill in brief?

Ans: Goodwill is an attractive force which brings in customers. The main

feature of this asset is that it helps in earning more profits for the
business. Goodwill is an intangible asset. It cannot be seen or felt but it
can be purchased or sold. Its value increases or decreases according to
the profit earning capacity of the business.

3. List the circumstances under which need for valuation of

goodwill of the firm may arise.(CBSE 2016, Foreign)

Ans: The need for valuation of goodwill of the firm may arise in the
following circumstances:

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(a) When a new partner is admitted.

(b) When a partner retires or dies.

(c) When there is a change in the profit sharing ratio among the
existing partners.

(d) When the partnership firm is sold as a going concern.

(e) When the partnership firm is converted into a company.

(f) When there is an amalgamation of firms.

4. List any four factors that help in the creation of goodwill of a

partnership firm.

Ans. Factors affecting the value of Goodwill:

(a) Location of the business: If the business is located at a prominent

place easily approachable by customers, it will earn good profits
and that will raise the value of goodwill.

(b) Efficiency of Management: If the management is efficient, the firm

will earn good profits and that will raise the value of goodwill.

(c) Quality of the products: If the firm enjoys good reputation for the
quality of its products, there will be a ready sale and the value of its
goodwill will be high.

(d) Contracts: Sometimes, a firm enters into long-term contracts for

sale and purchase of goods at favourable prices. This will increase
the firm’s profits as well as the value of its goodwill.

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(e) Market situation: If a firm enjoys monopoly market or has limited
competition, it will earn higher profits. This will result in increasing
the value of goodwill.

5. Briefly explain the “Average Profit Method” of valuation of

goodwill.

Ans: Average Profit Method: Under this method, the goodwill is valued
as follows: Goodwill = Average Profits ×No. of Year’s Purchase

Thus, valuation of goodwill under this method involves two steps:

Step 1: Ascertain the average profit as follows after taking into account
the profits of the past few years:

Average Profit = Total Profits/No. of Years

Note: While calculating average profits, the profits of past years must be
adjusted in the light of future possibilities.

Step 2: Multiply the average profits by a certain number of year’s

purchase of profits as may be agreed upon. The product will be the value
of goodwill.

Thus, Goodwill = Average Profits × No. of Year’s Purchase

Example: The goodwill of a firm is estimated at 3 years’ purchase of the average

profit of the last 5 years. Profits for last 5 years are: 2009 – Rs. 45,000; 2010 –
Rs.40,000; 2011 – Rs.50,000; 2012 – Rs. 47,000; 2013 – Rs.58,000. Calculate the
value of goodwill.

Solution: Average Profits = 45,000 + 40,000 + 50,000 + 47,000 + 58,000 / 5 =

Rs.48,000

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6. Briefly explain the “Super Profit Method” of valuation of goodwill.

Ans. Super Profit Method: Under this method, the goodwill is valued as follows:

Goodwill = Super Profits × No. of Year’s Purchase

Valuation of goodwill under this method involves four steps:

Step 1 : Ascertain average profit as follows:

Average Profit = Total Profits/ No. of Years

Step 2 : Ascertain normal profit as follows:

Normal Profit = Capital Employed × Normal rate of return / 100

Step 3 : Ascertain super profit as follows:

Super Profits = Average Profits – Normal Profits

Step 4 : Multiply the super profits by a certain number of year’s purchase

as may be agreed upon.

The product will be the value of goodwill.

Thus, Goodwill = Super Profits × No. of Year’s Purchase

Example: A firm earned profits of 8,000; Rs. 10,000; Rs.12,000 and Rs.16,000 in the last
four years. The firm has capital investment of Rs.50,000. A fair rate of return on
investment is 15%. Calculate goodwill of the firm based on 3 years purchase of average
super profit of last four years.

Solution: Average Profit = Total Profits / No. of Years = 8,000 + 10,000 + 12,000 + 16,000
/ 4 = Rs.11,500

Normal Profit = Capital Employed × Normal rate of return / 100 = 50,000 × 15/100 = Rs.7,500

Super Profits = Average Profits – Normal Profits = Rs.11,500 – Rs.7,500 = Rs.4,000

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Goodwill = Super Profits × No. of years’ purchase = Rs.4,000 × 3 = Rs.12,000

7. Briefly explain the “Capitalisation Method” of valuation of

goodwill.

Ans. Capitalisation Method: Under this method, goodwill can be valued in

two ways:

(a) Capitalisation of Average Profit Method: Under this method,

goodwill is valued as follows:

Goodwill = Total Value of Business – Net Tangible Assets

Valuation of goodwill under this method involves 4 steps:

Step 1: Ascertain average profit as follows:

Average Profit = Total Profits / No. of Years

Step 2: Ascertain total capitalised value of business as follows:

Total Value of Business = Average Profit × 100/ Normal rate of return

Step 3: Ascertain net tangible assets as follows:

Net Tangible Assets = Total Tangible Assets – Outside Liabilities

Step 4: Calculate value of goodwill by applying the following formula:

Goodwill = Total value of Business – Net Tangible Assets

Example: A firm has earned an average profit of Rs.33,000 during the

last few years and the normal rate of return in similar type of business is
15%. The total assets of the firm are Rs.1,80,000 whereas liabilities are

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Rs.20,000. Find the value of goodwill by capitalization of average profit
method.

Solution: Average Profit = Rs.33,000 (given)

Total value of business = Average Profit × 100 / Normal rate of return =

33,000 × 100/15 = Rs.2,20,000

Net Tangible Assets = Total Tangible Assets – Outside Liabilities =

1,80,000 – 20,000 = Rs.1,60,000

Goodwill = Total value of Business – Net Tangible Assets = Rs.2,20,000 –

Rs.1,60,000 = Rs.1,60,000

(b) Capitalisation of Super Profit Method : Under this method,

goodwill is valued as follows:

Valuation of goodwill under this method involves following steps:

Step 1: Ascertain average profit as follows:

Average Profit = Total Profits/No. of Years

Step 2: Ascertain normal profit as follows:

Normal Profit = Capital Employed × Normal rate of return / 100

Step 3: Ascertain super profit as follows:

Super Profit = Average Profit – Normal Profit

Step 4: Calculate the value of goodwill as follows:

Goodwill = Super Profit × 100 / Normal rate of return

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Example: A firm has earned an average profit of Rs.33,000 during the
last few years and the normal rate of return in similar type of business is
15%. The total assets of the firm are Rs.1,80,000 whereas liabilities are
Rs.20,000. Find the value of goodwill by capitalization of super profit
method.

Solution: Average Profit = Rs.33,000 (given)

Capital Employed = Total Assets – Liabilities = 1,80,000 – 20,000 =

Rs.1,60,000

Normal Profit = Capital Employed × Normal rate of return / 100

= Rs.1,60,000 × 15 / 100 = Rs.24,000

Super Profit = Average Profit – Normal Profit = 33,000 – 24,000 = Rs.9,000

Goodwill = 9,000 × 100 / 15 = Rs.60,000

8. Distinguish between ‘Average Profits’ and ‘Super Profits’.

Ans. Distinguish between Average Profits and Super Profits:

Basis Average Profits Super Profits

Meaning It means average of the It means the excess of
profits of past few years. average profits over normal
profits.
Formula Average Profit = Total Super Profits = Average
Profits / No. of Years Profits – Normal Profits

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Question 1: Goodwill is to be valued at three years' purchase of four
years' average profit. Profits for last four years ending on 31st March of
the firm were:

2016 −12,000; 2017 − 18,000;

2018 − 16,000; 2019 − 14,000.

Calculate amount of Goodwill.

Question2: Profits for the five years ending on 31st March, are as
follows:

Year 2015 − 4,00,000; Year 2016 − 3,98,000;

Year 2017 − 4,50,000; Year 2018 − 4,45,000 and

Year 2019 − 5,00,000.

Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years'

average profit.

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 2018-19; 2017-18; 2016-17; 2015-16; 2014-15 (respectively)

Profits 8,00,000; 15,00,000; 18,00,000; 4,00,000; Loss 13,00,000

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 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.

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Question 5: Purav and Purvi are partners in a firm sharing profits and losses in the
ratio of 2 : 1. They decide to take Parv into partnership for 1/4th share on 1st April,
2019. For this purpose, goodwill is to be valued at four times the average annual
profit of the previous four or five years, whichever is higher. The agreed profits for
goodwill purpose of the past five years are:

Year 2014-15; 2015-16; 2016-17; 2017-18; 2018-19;

Profits 14,000; 15,500; 10,000; 16,000; 15,000. (respectively)

Calculate the value of goodwill.

Question 6: Annu, Baby and Chetan are partners in a firm sharing profits and
losses equally. They decide to take Deep into partnership from 1st April, 2019 for
1/5th share in the future profits. For this purpose, goodwill is to be valued at 100%
of the average annual profits of the previous three or four years, whichever is
higher. The annual profits for the purpose of goodwill for the past four years were:

Year Ended Profit Profit(Rs.)

31st March, 2019 2,88,000;

31st March, 2018 1,81,800;

31st March, 2017 1,87,200;

31st March, 2016 2,53,200.

Calculate the value of goodwill.

Question 7: Divya purchased Jyoti's business with effect from 1st April,
2019. Profits shown by Jyoti's business for the last three financial years
were:

2016-17 : Rs.1,00,000 including an abnormal gain of Rs.12,500

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2017-18 : Rs.1,25,000 after charging an abnormal loss of Rs.25,000

2018-19 : 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.

Question 8: Abhay, Babu and Charu are partners sharing profits and
losses equally. They agree to admit Daman for equal share of profit. For
this purpose, the value of goodwill is to be calculated on the basis of four
years' purchase of average profit of last five years. These profits for the
year ended 31st March, were:

Year 2015; 2016; 2017; 2018; 2019 (respectively)

Profit/Loss 1,50,000; 3,50,000; 5,00,000; 7,10,000; (-5,90,000)

On 1st April, 2018, a car costing 1,00,000 was purchased and debited to
Travelling Expenses Account, on which depreciation is to be charged @
25%. Interest of 10,000 on Non-trade Investments is credit to income for
the year ended 31st March, 2018 and 2019.

Calculate the value of goodwill after adjusting the above.

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Question 9: Bharat and Bhushan are partners sharing profits in the ratio of 3 : 2. They
decided to admit Manu as a partner from 1st April, 2019 on the following terms:

I. Manu will be given 2/5th share of the profit.

ii. Goodwill of the firm will be valued at two years' purchase of three years' normal
average profit of the firm.

Profits of the previous three years ended 31st March, were:

2019 – Profit 30,000 after debit in loss of stock by fire 40,000

2018 – Loss 80,000 includes voluntary retirement compensation paid 1,10,000

2017 – Profit 1,10,000 including a gain (profit of 30,000 on the sale of fixed
assets).

Question 10 Bhaskar and Pillai are partners sharing profits and losses in the
ratio of 3 : 2. They admit Kanika into a 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 the past
three years. Profits of the last three years ended 31st March, were:

2017 – Profit ₹ 50,000 (including profit on the sale of assets ₹ 5,000).

2018 – Loss ₹ 20,000 (including loss by fire ₹ 30,000).

2019 – Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and

interest on investments and Dividend received ₹ 8,000).

Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.

Question 11 Sumit purchased Amit’s business on 1st April, 2019. Goodwill was
decided to be valued at two years’ purchase of the average normal profit of
the last four years. The profits for the past four years were:

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Year 31st March, 31st March, 31st March,
31st March, 2016
Ended 2017 2018 2019

Profit 80,000 1,45,000 1,60,000 2,00,000

Question 12 Geet and Meet are partners in a firm. They admit Jeet into a
partnership for an equal share. It was agreed that goodwill will be valued
at three years’ purchase of the average profit of the last five years.
Profits for the last five years were:

Year 31st March, 31st March, 31st March, 31st March, 31st March,
Ended 2015 2016 2017 2018 2019

Profits 90,000
1,60,000 1,50,000 65,000 1,77,000
(₹) (Loss)

Books of Account of the firm revealed that:

(i) The firm had a gain (profit) of ₹ 50,000 from the sale of machinery
sold in the year ended 31st March, 2016. The gain (profit) was credited in
Profit and Loss Account.

(ii) There was an abnormal loss of ₹ 20,000 incurred in the year ended
31st March, 2017 because of a machine becoming obsolete in an
accident.

(iii) Overhauling the cost of second-hand machinery purchased on 1st

July, 2017 amounting to ₹ 1,00,000 was debited to the Repairs Account.
Depreciation is charged @ 20% p.a. on Written Down Value Method.

Calculate the value of goodwill.

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Question 13 Profits of a firm for the year ended 31st March for the last five
years were:

Year 31st March, 31st March, 31st March, 31st March, 31st March,
Ended 2015 2016 2017 2018 2019

Profits ₹ 20,000 24,000 30,000 25,000 18,000

Calculate the 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, 2015, 2016, 2017,
2018 and 2019.

Question 14 A and B are partners sharing profits and losses in the ratio of 5
: 3. On 1st April, 2019, C is admitted to the partnership for 1/4th share
of profits. For this purpose, goodwill is to be valued at two years’
purchase of the last three years’ profits (after allowing partners’
remuneration). Profits to be weighted 1 : 2 : 3, the greatest weight being
given to last year. Net profit before partners’ remuneration were: 2016-
17 : ₹ 2,00,000; 2017-18 : ₹ 2,30,000; 2018-19 : ₹ 2,50,000. The
remuneration of the partners is estimated to be ₹ 90,000 p.a. Calculate
the amount of goodwill.

Question 15 Raman and Daman are partners sharing profits in the ratio of
60 : 40 and for the last four years, they have been getting annual
salaries of ₹ 50,000 and ₹ 40,000 respectively. The annual accounts have
shown the following net profit before charging partners’ salaries:

Year ended 31st March, 2017 − ₹ 1,40,000; 2018 − ₹ 1,01,000 and 2019
− ₹ 1,30,000.

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On 1st April, 2019, Zeenu is admitted to the partnership for 1/4th share
in profit (without any salary). Goodwill is to be valued at four years’
purchase of weighted average profit of last three years (after partners’
salaries); Profits to be weighted as 1 : 2 : 3, the greatest weight being
given to the last year. Calculate the value of Goodwill.

Question 16 Calculate the goodwill of a firm on the basis of three years’

purchase of the Weighted Average Profit of the last four years. The profits
of the last four financial years ended 31st March, were: 2016 − ₹ 25,000;
2017 − ₹ 27,000; 2018 − ₹ 46,900 and 2019 − ₹ 53,810. The weights
assigned to each year are 2016 − 1; 2017 − 2; 2018 − 3; 2019 − 4. You
are supplied the following information:

(i) On 1st April, 2016, a major plant repair was undertaken for ₹ 10,000
which was charged to revenue. The said sum is to be capitalised for
goodwill calculation subject to adjustment of depreciation of 10% on
Reducing Balance Method.

(ii) The Closing Stock for the years ended 31st March, 2017 and 2018
were overvalued by ₹ 1,000 and ₹ 2,000 respectively.

(iii) To cover management costs an annual charge of ₹ 5,000 should be

made for the purpose of goodwill valuation.

Question 17 Dinesh and Mahesh are partners sharing profits and losses in
the ratio of 3 : 2. They admit Ramesh into partnership for 1/4th share in
profits. Ramesh brings in his share of goodwill in cash. Goodwill for this
purpose shall be calculated at two years’ purchase of the weighted
average normal profit of past three years. Weights being assigned to each
year 2017−1; 2018−2 and 2019−3. Profits of the last three years were:

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2017 − Profit ₹ 50,000 (including profits on sale of assets ₹ 5,000).

2018 − Loss ₹ 20,000 (including loss by fire ₹ 35,000).

2019 − Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and

interest on investments and dividend received ₹ 8,000).

Calculate the value of goodwill. Also, calculate the goodwill brought in by

Ramesh.

Question 18 Manbir and Nimrat are partners and they admit Anahat into
partnership. It was agreed to value goodwill at three years’ purchase on
Weighted Average Profit Method taking profits of the last five years. Weights
assigned to each year as 1, 2, 3, 4 and 5 respectively to profits for the year
ended 31st March, 2015 to 2019. The profits for these years were: ₹ 70,000,
₹ 1,40,000, ₹ 1,00,000, ₹ 1,60,000 and ₹ 1,65,000 respectively.

Scrutiny of books of account revealed following information:

(i) There was an abnormal loss of ₹ 20,000 in the year ended 31st March,
2015.

(ii) There was an abnormal gain (profit) of ₹ 30,000 in the year ended 31st March,
2016.

(iii) Closing Stock as on 31st March, 2018 was overvalued by ₹ 10,000.

Calculate the value of goodwill.

Question 19 Mahesh and Suresh are partners and they admit Naresh into
partnership. They agreed to value goodwill at three years’ purchase on
Weighted Average Profit Method taking profits for the last five years. They

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assigned weights from 1 to 5 beginning from the earliest year and onwards.
The profits for the last five years were as follows:

Year 31st March, 31st March, 31st March, 31st March, 31st March,
Ended 2015 2016 2017 2018 2019

Profits
1,25,000 1,40,000 1,20,000 55,000 2,57,000
(₹)

Scrutiny of books of account revealed the following:

(i) A second-hand machine was purchased for ₹ 5,00,000 on 1st July, 2017 and
₹ 1,00,000 was spent to make it operational. ₹ 1,00,000 were wrongly debited
to the Repairs Account. Machinery is depreciated @ 20% p.a. on Written Down
Value Method.

(ii) Closing Stock as on 31st March, 2018 was undervalued by ₹ 50,000.

(iii) Remuneration to partners was to be considered as charge against profit

and remuneration of ₹ 20,000 p.a. for each partner was considered
appropriate.

Calculate the value of goodwill.

Question 20 Calculate the goodwill of a firm on the basis of three years’ purchase of

the weighted average profit of the last four years. The appropriate weights to be
used and profits are:

Year 2015-16 2016-17 2017-18 2018-19

Profits (₹) 1,01,000 1,24,000 1,00,000 1,40,000

Weights 1 2 3 4

On a scrutiny of the accounts, the following matters are revealed:

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(i) On 1st December, 2017, a major repair was made in respect of the plant
incurring ₹ 30,000 which was charged to revenue. The said sum is agreed to
be capitalised for goodwill calculation subject to adjustment of depreciation
of 10% p.a. on Reducing Balance Method.

(ii) The closing stock for the year 2016-17 was overvalued by ₹ 12,000.

(iii) To cover management cost, an annual charge of ₹ 24,000 should be

made for the purpose of goodwill valuation.

(iv) On 1st April, 2016, a machine having a book value of ₹ 10,000 was
sold for ₹ 11,000 but the proceeds were wrongly credited to profit and loss
account. No effect has been given to rectify the same. Depreciation is
charged on machine @10% p.a. On reducing balance method.

Question 21 Average profit earned by a firm is ₹ 80,000 which includes

undervaluation of stock of ₹ 8,000 on an average basis. The capital invested
in the business is ₹ 8,00,000 and the normal rate of return is 8%. Calculate
goodwill of the firm on the basis of 7 times the super profit.

Question 22 Gupta and Bose had a firm in which they had invested ₹
50,000. On average, the profits were ₹ 16,000. The normal rate of return in
the industry is 15%. Goodwill is to be valued at four years’ purchase of
profits in excess of profits @ 15% on the money invested. Calculate the
value of goodwill.

Question 23 The total capital of the firm of Sakshi, Mehak and Megha is
₹ 1,00,000 and the market rate of interest is 15%. The net profits for the
last 3 years were ₹ 30,000; ₹ 36,000 and ₹ 42,000. Goodwill is to be
valued at 2 years’ purchase of the last 3 years’ super profits. Calculate
the goodwill of the firm.

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Question 24 Rakesh and Ashok earned a profit of ₹ 5,000. They employed
the capital of ₹ 25,000 in the firm. It is expected that the normal rate of
return is 15% of the capital. Calculate the amount of goodwill if goodwill
is valued at three years’ purchase of super profit.

Question 25 Average net profit expected in future by XYZ firm is ₹

36,000 per year. Average capital employed in the business by the firm is
₹ 2,00,000. The normal rate of return from capital invested in this class
of business is 10%. Remuneration of the partners is estimated to be ₹
6,000 p.a. Calculate the value of goodwill on the basis of two years’
purchase of super profit.

Question 26 A partnership firm earned net profits during the last three
years ended 31st March, as follows: 2017 − ₹ 17,000; 2018 − ₹ 20,000;
2019 − ₹ 23,000.

The capital investment in the firm throughout the above-mentioned

period has been ₹ 80,000. Having regard to the risk involved, 15% is
considered to be a fair return on the capital. Calculate value of goodwill
on the basis of two years’ purchase of average super profit earned during
the above-mentioned three years.

Question 27 A partnership firm earned net profits during the past three years as
follows:

Year ended 31st March, 2019 31st March, 2018 31st March, 2017

Net Profit (₹) 2,30,000 2,00,000 1,70,000

Capital investment 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 the partners during this period is estimated to
be ₹ 1,00,000 p.a.

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Calculate value of goodwill on the basis of two years’ purchase of average super profit
earned during the above-mentioned three years.

Question 28 Ideal Marketing earned an average profit of ₹ 4,00,000 during

the last five years. Normal rate of return on capital employed is 10%.
Balance Sheet of the firm as at 31st March, 2019 was as follows:

Liabilities ₹ Assets ₹

Capital A/cs: Land and Building 10,00,000

Shyam 5,00,000 Furniture 2,00,000

Sunder 5,00,000 10,00,000 Investments 1,00,000

Current A/cs: Sundry Debtors 5,00,000

Shyam 2,00,000 Bills Receivable 50,000

Sunder 2,00,000 4,00,000 Closing Stock 3,00,000

Reserves 3,40,000 Cash in Hand 50,000

Sundry Creditors 4,00,000 Cash at Bank 1,00,000

Bills Payable 1,00,000

Outstanding Expenses 60,000

23,00,000 23,00,000

Calculate the value of goodwill, if it is valued at three years’ purchase of Super

Profits.

Question 29 Varuna and Karuna are partners for equal shares. They admit Lata
into partnership for 1/4th share. It was agreed to value goodwill of the firm at 4
years’ purchase of super profit. Normal rate of return is 15% of the capital
employed. Average profit of the firm is ₹ 4,00,000. Balance Sheet of the firm as at
31st March, 2019 was as follows:

Liabilities ₹ Assets ₹

Capital A/cs: Furniture 4,00,000

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Varuna 5,00,000 Computers 3,00,000

Karuna 5,00,000 10,00,000 Electrical Fittings 1,00,000

Long-term Loan 5,50,000 Investments (Trade) 2,00,000

Sundry Creditors 2,00,000 Stock 3,00,000

Outstanding Expenses 50,000 Sundry Debtors 3,00,000

Advances from Customers 1,50,000 Bills Receivable 50,000

Cash in Hand 50,000

Cash at Bank 2,00,000

Deferred Revenue
Expenditure:

Advertisement Suspense 50,000

19,50,000 19,50,000

Calculate the value of goodwill.

Question 30 A business earned an average profit of ₹ 8,00,000 during the

last few years. The normal rate of profit in the similar type of business is
10%. The total value of assets and liabilities of the business were ₹
22,00,000 and ₹ 5,60,000 respectively. Calculate the value of goodwill of the
firm by super profit method if it is valued at 2½% years’ purchase of super
profits.

Question 31 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.

Question 32: Supreet and Subham are equal partners. They decide to

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admit Akriti for 1/3rd share. For the purpose of admission of Akriti, goodwill
of the firm is to be valued at four years' purchase of super profit. Average
capital employed in the firm is Rs.1,50,000/-. Normal rate of return may be
taken as 15% p.a. Average profit of the firm is Rs.40,000. Calculate value of
goodwill.

Question 33: On 1st April, 2019 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/-. The normal rate of return is 20% and goodwill of the firm is valued at
Rs.24,000/- at four years' purchase of super profits, find average profit per year of
the existing firm.

Question 34: 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.6,63,000 and the normal rate of return is 5%.
calculate goodwill of the firm on the basis of 5 times of super profit.

Question 35: Average profit earned by a firm is Rs.7,50,000 which includes

overvaluation of stock 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 times the super profit.

Question 36: Ayub and Amit are partners in a firm and they admit Jaspal
into partnership w.e.f. 1st April, 2019. They agreed to value goodwill at 3
years' purchase of super profit method for which they decided to average
profit of last 5 years. The profits for the last 5 years were:

Year ended Profits(Rs.)

31st March, 2015 - 1,50,000

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31st March, 2016 - 1,80,000

31st March, 2017 - 1,00,000 (including abnormal loss of Rs.1,00,000)

31st March, 2018 - 2,60,000 (including abnormal gain (profit) of Rs.40,000)

31st March, 2019 - 2,40,000

The firm has total assets of Rs.20,00,000 and liabilities of Rs.5,00,000 as on

that date. Normal rate of return in similar business is 10%. Calculate value
of goodwill.

Question 37: 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/-
.

Question 38: business has earned average profit of Rs.1,00,000 during the
last few years. Find out the value of goodwill by capitalization 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%.

Question 39: From the following particulars, calculate value of goodwill of a

firm by applying capitalization of average profit method:

a. Profits for the last five consecutive years ending 31st March are 2019-
54,000; 2018-42,000; 2017-39,000; 2016-67,000; and 2015-59,000.

b. Capitalization rate 20%

c. Net assets of the firm Rs.2,00,000.

Question 40: a business has earned average profit of Rs.4,00,000 during

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the last few years and the normal rate of return in similar business is 10%.
Find value of goodiwll by:

a. Capitalization of super profit method

b. 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 is

Rs.7,20,000/-.

Question 41: A firm earns profit of Rs.5,00,000. Normal rate of return is a

similar type of business is 10%. The value of total assets (excluding
goodwill) and total outsiders' liabilities a on the date of goodwill are
Rs.55,00,000 and Rs.14,00,000 respectively. Calculate value of goodwill
according to the capitalization of super profit method as well as capitalization
of average profit method.

Question 42: 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
partner's 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.

Question 43: Average profit of the firm is Rs.2,00,000. Total assets of the
firm are Rs.15,00,000 whereas partners' capital is Rs.12,00,000/-. If normal
rate of return in a similar business is 10% of the capital employed, what is
the value of goodwill by capitalization of super profit.

Question 44: Rajan and Rajani are partners in a firm. Their capitals were
Rajan Rs.3,00,000, Rajani Rs.2,00,000. During the year 2018-19, the firm
earned a profit of Rs.1,50,000. Calculate the value of goodwill of the firm by

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capitalization of super profit assuming that the normal rate of return is 10%.

Question 45: 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:

a. Super profit method at three years' purchase and

b. capitalization of super profit method.

Question 46: 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 the value
of goodwill by :

a. Capitalization of super profit method

b. Super profit method is the goodwill is valued at 3 years' purchase of super profit.

Assets of the business were Rs.40,00,000 and its external liabilities Rs.7,20,000/-.

Question 47: 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.

a. By capitalization method and

b. By super profit method if the goodwill is valued at 2 years' purchase of super

profit.

Question 48: From the following information, calculate the value of goodwill of the
firm:

a. At three years' purchase of average profit.

b. At three years' purchase of super profit.

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c. On the basis of capitalization of super profit.

d. 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, 2018 – 2,00,000/-

31st March, 2017 – 1,80,000/-

31st March, 2016 – 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

investment) is Rs.7,00,000 whereas partners capital is Rs.6,00,000 and outside
liabilities is Rs.1,00,000/-.

ASSIGNMENT FOR SELF-PRACTICE

1. The goodwill of a firm is estimated at 3 years purchase of average

profit of the last 4 years which are as follows:

Year 2010-11 2011-12 2012-13 2013-14

Profit ₹20,000 ₹34,000 ₹28,000 ₹26,000
Earned

Calculate value of goodwill.

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 2. The goodwill of a firm is estimated at 2 years purchase of average
profit of the last 4 year which are as follows:

Year 2010 2011 2012 2013

Profit ₹50,000 125% of 140% of 80% of
earned previous previous previous
year’s profit year’s profit year’s
profit

Calculate value of goodwill.

3. A,B and C are partners sharing profits and losses equally. On

1.4.2010, they admit D as a new partner for 1/4th share. It is
agreed that goodwill should be valued at two years’ purchase of the
average normal profits of past three years. The profits of the last
three years were:

2007-08 : Profit ₹ 50,000 (after debiting loss of stock worth ₹12,500

due to fire)

2008-09 : Profit ₹ 2,69,250 ( including insurance claim received ₹ 8,000

& lottery income ₹ 5,000)

2009-10 : Profit ₹ 3,12,500 (including non-recurring income of ₹

31,250)

4. From the following information, compute the value of goodwill at

two years purchase of the super profits:

Average profits : ₹21,500

Capital employed : ₹2,00,000

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Normal rate of return : ₹10%

5. A firm earned profits of ₹7,000; ₹6,500; ₹8,000; ₹6,000 and ₹7,500

in the last 5 years. The capital investment of the firm is ₹40,000. A
fair rate of return on capital in the market is 12%. Find out the value
of goodwill of the firm, if it is based on 3 years purchase of average
super profit of last 5 years.

6. The average net profits of a firm expected in the future are ₹90,000
per year. Capital employed in the business by the firm is ₹5,00,000.
The rate of interest expected from capital invested in this class of
business is 10%. The fair remuneration of the partners is estimated to
be ₹15,000 p.a. Find out the value of goodwill on the basis of 2 years’
purchase of super profit.

7. The goodwill of a firm is valued at ₹72,000 on the of 3 years’ purchase

of super profits. Find the super profits of the firm. Also find out the
average profits of the firm if the normal rate of return is 10% and the
firm has capital investment of ₹3,00,000.

8. A firm has earned an average profit of ₹67,500 during the last few
years on an average capital employed of ₹3,00,000. The normal rate
of return in similar type of business is 15%. Calculate the value of
goodwill by capitalization method.

9. A firm earns ₹30,000 as its average annual profits, the rate of normal
profit being 10%. The assets of the firm amount to ₹3,70,000
whereas liabilities amount to ₹1,30,000. Find out the value of goodwill
under capitalization method.

10. X & Y are partners sharing profits in the ratio of 2 : 3. They admit Z
into the partnership firm for 1/6th share of the future profits. The

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 goodwill of the firm is valued at ₹12,000 on the basis of 2 years’
purchase of the average super profits of the firm. The firm had
assets worth ₹5,00,000 and liabilities worth ₹2,00,000. The normal
earning capacity of such firms is expected to be 10% p.a. Find (a)
Super profits of the firm, (b) Average profits of the firm and (c)
Total profits earned by the firm during the last 2 years.

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