Class XII Accountancy

Integrated Assignment Ch-2 Nature and Valuation of Goodwill

Level 1

1. Goodwill of the firm on the basis of 2 years' purchase of average profit of the last 3 years is Rs. 25,000.
Find average profit.
(a) Rs. 50,000
(b) Rs. 25,000
( c ) Rs. 10,000
(d) Rs. 2500
2. Which of the following items are added to previous year’s profits for finding normal profits for
valuation of goodwill.?
a)Loss on sale of fixed assets b) Loss due to fire, earthquake etc
c) Undervaluation of closing stock d) All of the above

3 .Under which method of valuation of goodwill, normal rate of return is not considered?
a)Loss on sale of fixed assets b) Loss due to fire, earthquake etc
c) Undervaluation of closing stock d) All of the above

4. From the following information, calculate value of goodwill of M/s Amrit and Amar :
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- ₹10,00,000.
b. Net profit/loss of the firm for the past years 2021- ₹1,60,000; 2022- ₹1,40,000; 2023- ₹2,70,000
c. Normal Rate of Return on capital is 11%.
d. Remuneration to each partner for his service to be treated as a charge on profit ₹2,500/month
e. Assets excluding goodwill- ₹11,00,000. Liabilities- ₹1,00,000.
 Level 2
1. Weighted average profit method of calculating goodwill is used when:
(a) Profits are not equal
(b) Profits show a trend
(c) Profits are fluctuating
(d)None of the above

2. The capital employed of the firm of Aman and Bman is ₹10,00,000 and the normal rate of return in similar
business is 15%. The net profits for the last 3 years were:-
1st year ₹3,00,000 (including abnormal gain of ₹15,000)
2nd year ₹3,60,000 ( including abnormal loss of ₹10,000)
3rd year ₹4,20,000 ( Closing stock was undervalued by ₹5,000)
Annual salary/remuneration to partners is ₹60,000 each. They agreed to value goodwill at 2 years’ purchase by
super profit method for which they decided to take average of last 3 years profits. Calculate the goodwill of the
firm.
Level 3

1. Assertion: Average Normal Profit is multiplied by number of years' purchase to determine the value of
goodwill.
Reason: Number of years' purchase means the number of years for which the firm is likely to earn same amount
of profit after change in ownership becomes of the efforts put in the past.
(A) Both A and R true and R is the correct explanation of A.
(B) Both A and R are true but R is not the correct explanation of A
(C) A is true and R is false
(D) A is false and R is true
2. D, S and M are partners sharing profits and losses in the ratio of 3:2:1. With effect from 1st April, 2022 they
agree to share profits equally. For this purpose, goodwill is to be valued at two year’s purchase of the average
profit of last four years, which were as follows:
Year ending on 31st March,2019 ₹ 50,000 (Profit) Year ending on 31st March,2020 ₹ 1,20,000 (Profit) Year
ending on 31st March,2021 ₹ 1,80,000 (Profit) Year ending on 31st March,2022 ₹ 70,000 (Loss).
On 1st April, 2021 a Motor Bike costing ₹ 50,000 was purchased and debited to travelling expenses account, on
which depreciation is to be charged @ 20% p.a by Straight Line Method. The firm also paid an annual
insurance premium of ₹ 20,000, which had already been charged to Profit and Loss Account 3 for all the years.
Calculate the amount of Goodwill.

3. On April l, 2020, a firm had assets of ₹1,00,000 including cash of ₹10,000 but excluding stock of ₹20,000.
The current liabilities were ₹10,000 and the balance constituted Partners’ Capital Accounts. If the normal rate
of return is 8% and the Goodwill of the firm is valued at ₹60,000 at four years purchase of super profit, find the
average profits of the firm.
4. A and B are partners in a business. Balance in Capital and Current accounts on 31st March , 2020 were :
Partner Capital A/c (₹) Current A/c(₹)
A 10,00,000 1,60,000
B 7,00,000 40,000(Dr.)

Profits of the last five consecutive years ending 31st March were:
2016 -₹1,20,000 ; 2017-₹80,000(Loss) ; 2018-₹2,60,000 ; 2019-₹4,00,000 and 2020-₹5,00,000.
General reserve appeared in the books at ₹1,00,000. If the normal rate of return is 10%, find the value of
Goodwill by Capitalisation of Average profit method.

Case Study
Jay and Vijay are partners in a Cookies making firm. Because of their capability and hard efforts they have
earned a good name in the market. Their fixed capital were ₹12,00,000 and ₹8,00,000 respectively. There were
credit balances in their current account of ₹8,00,000 and ₹10,00,000 respectively. The firm had a balance of
₹2,00,000 in general reserve ,a liability of ₹1,00,000. They admitted Rishika into partnership for 25% share in
the profits of the firm. The average profits of the firm for the last five years were ₹ 10,00,000.
Jay informed Vijay that on an average basis other Cookies making firms have invested double of their capital in
their firm and earning the profits of ₹ 8,00,000.

Based on the above case, answer the following questions,

I. The amount of capital employed will be

a) ₹40,00,000
b) ₹41,00,000
c) ₹42,00,000
d) None of these
II. Calculate the Normal Rate of Return of Cookies Industry.

a) 10%

b) 15%
 c) 20%

d) 25%

III. On the basis of two years’ purchase of super profit method, the value of goodwill will be

a) 0

b) ₹3,00,000

c) ₹6,00,000

d) ₹12,00,000

IV. Calculate the value of goodwill by capitalization method

a) 0

b) ₹30,00,000

c) ₹60,00,000

d) ₹1,20,00,000