ar Chapter 2- Goodwill: Nature and Valuation 2.31 er which Accounting Standard, Goodwill valued . ee jhe books of aceount? on the basis of average profits will not be 1 ASB 2. AS-10 3, AS-26 4. AS-4 Ans. lAns QA. 2, B. 3, C2, D. 3, QA. 3, B. 1, C4, D. 3) 68 scan QR Code for Additional MC j 8 pased MCQs ‘Qs and Assertion-Reason Boe ERE] ere average Profit Method 4, Goodwill is to be valued at three years’ purchase of four years’ average profit. Normal Business Profits of the frm for last four years ending 31st March, were: 20218 12,000; 2022—% 18,000; 2023—% 16,000; 2024—% 14,000. Calculate amount of Goodwill. tans: Goodwill 45,0001 2 Profits for the five years énding 31st March, are as follows: ear 2020-—% 4,00,000; Year 2021—€ 3,98,000; Year 202% 4,50,000; Year 2023—% 4.45,000 and Year 2024—X 5,00,000. k Gleulate goodwill of the firm on the basis of 4 years’ purchase of 5 years’ average profit. i (CERT, Modified) | [ans.: Goodwill 17,54,400] 4. Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2: 1. They admit Pary into | partnership for 1/4th share on 1st Apri, 2024, For this purpose, goodwill isto be valued at four times the average annul profit of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years ended 31st March, ar Year 2020 2021 | 2022 202 Profits (%) 14,000 15,500 10,000 16.000 | 15,000 [Ans.: Goodwill 56,500.) Calculate the value of goodwill. Average Profit Method when Past Adjustments are Made 4 Asin and Shreyas were partners sharing profits and losses in the ratio of 2: 1. They admitted Shyam as a partner for 1/Sth share in profits. Fr this purpose, Goodwil ofthe firm was to be valued on the basis of three Yeats purchase of last five years’ average profit, Profits forthe last five years ended 31st March, were: 2021 Profits (@) 1,25,000 : 1,00,000 Year llowing: (000 for abnormal loss being goods lost by fire. Gleulate Goodwill of the firm after adjusting the fol Profit of 2020-21 was calculated after charging € 25% {Ans.: Goodwill—% 3,00,000.]2.32 Double Entry Book Keeping—CBSE XII Madhu and Vidhi are partners sharing profits in the ratio of 3 : 2. They decided to admit partner from 1st April, 2024 on the following terms: () Manu will be given 2/Sth share of the profit (i) Gocdilof the frm willbe valued at two years’ purchase of three years’ normal average profit of th, Profts of the previous three years ended 31st March, were: 2024—Profit % 30,000 (after debiting loss of stock by fire % 40,000), 2023—Loss % 80,000 (includes voluntary retirement compensation paid % 1,10,000). 2022—Profit % 1,10,000 (including a gain (profit) of % 30,000 on the sale of fixed assets), Calculate the value of goodwill, tans: Gooduill& 12999) Mans ae, fim, 6. Tarang purchased Jyot’s business with effect from 1st April, 2024, Profits shown by Jyots business the last three financial years ended 31st March, were: 2022: 1,00,000 (including an abnormal gain of ¥ 12,500), 2023: &1,25,000 (after charging an abnormal loss of % 25,000). 2024 + © 1,12,500 (excluding % 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 years' purchase of the average profit ofthe lat three years. [Ans Goodwill X 2,25.099) 7. Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for equal share of profit. For this purpose, value of goodwill is to be calculated on the basis of four year Purchase of average profit of last five years. These profits for the year ended 31st March, were: Year 2020 2021 .. 2022, | 2023 2024. Profits/Loss (%) 150,000 3,50,000 5,00,000 7,410,000 690,000) On 1st April, 2023, a two-wheeler was purchased for % 1,00,000 and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25% pa. Interest of € 10,000 on Non-trade Investments is credit to Income for the year ended 31st March, 2023 and 2024. Calculate the value of goodwill after adjusting the above. (Ans: Goodwill 9,40,000] 8. Sumit purchased Amit’s business on 1st April, 2024. 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, 2021 | 31st March, 2022 | 31st March, 2023 | (31st March, 2024 Profits (@%) 80,000 145,000 1,60,000 2,00,000 Books of Account revealed that: {i) Abnormal loss of € 20,000 was debited to Profit & Loss Account for the year ended 31st March, 2021. (ii) A fixed asset was sold in the year ended 31st March, 2022 and gain (profit) of % 25,000 was credited to Profit & Loss Account, (iil) In the year ended 31st March, 2023 assets of the firm were not insured due to oversight. Insurance premium not paid was € 15,000. Calculate the value of goodwill. [Ans.: Goodwill 2,82,500) Weighted Average Profit Method 9. Profits of a firm for the year ended 31st March for the last five years were: = YearEnded | 31stMarch, 2020 | 31stMarch, 2021 | 31stMarch,2022 | 31stMarch, 2023 | 31st March 2024 Profits (2) 20,000 24,000 30,000 25,000 18,000 Calculate value of goodwill on the basis of three years’ purchase of Weighted Average Proft after assigning weights 1,2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2020, 2024 2022, 2023 and 2024, TAns.: Goodwill —€ 69,60Chapter 2 - Goodwill: Nature and Valuation 2.33 Year ended 31st March, 2022— 1,40,000; 2023 14 01,000 and 2024— 1,30,000, ‘ ship for 1/4th share in profit (without any salary). years’ Purchase of weighted average profit of last three years (after ighted as 1, 2 and 3, the greatest weight being given to the last year. [Ans.: Goodwill 1,28,000] On 1st April, 2024, Zeenu is admitted to the partner Goodwill is to be valued at four partners’ salaries); Profits to be wei Calculate the value of Goodwill, Super Profit Method WW 12 13. 14, 15. 16. 7 The cel of the firm of Anuj and Benu is € 10,00,000 and the market rate of interest is 1566, Annual salary to Ache is % 60,000 each. The profits for the last three years were & 3,00,000, & 3,60,000 and % 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, (C8SE 2019) ‘ [Ans.: Goodwill—Z 1,80,000.} Atul and Bipul had a firm in which they had invested % 50,000. On an 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. {Ans.: Goodwill 34,000.) 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 profit. Calculate the goodwill of the firm. (Delhi 20170 {Ans.: Goodwill—X 42,000.) Aand 8 were partners ina firm sharing profits equally. Their capitals were: A 1,20,000 and B—¥ 80,000. The annual rate of interest is 20%. Profits of the firm for the last three years were % 34,000; & 38,000 and ¥ 30,000. They admitted C as a new partner. On C’s admission the goodwill of the firm was valued at 2 years’ purchase of the super profits. Calculate the value of goodwill of the firm on C’s admission. (CBSE 2023) [Ans.: Since the firm has negative super profit, the firm does not have goodwill] [Hint: Normal Profit = 20% of Capital Employed = 20/100 x & 2,00,000 = & 40,000 % 34,000 + & 38,000 + & 30,000 3 Super Profit = Average Profit - Normal Profit, = & 34,000 - ¥ 40,000 = = € 6,000] ‘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 2% years’ purchase of super profit. (Delhi 2014 Q) [ans.: Net Assets = 22,00,000 -¥ 5,60,000 = 16,40,000; Normal Profit— 1,64,000; Super Profit— 6,36,000; Goodwill 15,90,000] i i 4 ital employed in the Aver + profit expected in future by XYZ firm is % 36,000 per year. Average capital n Baines: by pe frm ie € 200,000, 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. Tans epee st 20.000 A partnership firm earned net profits during the last three years ended 31st March, as follows: 2022—% 17,000; 2023—X 20,000; 2024—% 23,000. i Ic = been % 80,000. Having it in the firm throughout the above-mentioned period has r : me oa tae awed 159% 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. Average Profit = = % 34,000 [Ans.: Goodwill— 16,000.)2.34 Double Entry Book Keeping—CBSE XII Calculation of Average Profits, Normal Rate of Return and Capital Employeq an existing firm had assets of ® 75,000 including cash of % 5,000, tts cred, at date, The firm had a Reserve of % 10,000 whl fart ntl ; 0 fe of Return Is 20% and goodwill of the fire is yal ‘a balance of & 60,000, If Normal Rate of Return I sg tao oo a our Yeats! purchase of super profit, find average profit per year of the e7isting firm, ' (Ans: Capital Employed—# 70,000; Normal Profit—® 14,000; Super Proft—z gay, Average Profit = Monmal Profit + Super Profit = 29999 18. On Ist April, 2024, amounted to & 5,000 on thi 1s % 2,00,000 and the normal rate of return in a sing Average profit of a firm during the last few years th ; business is 10%. If the goodwill of the firm Is % 2,50,000 at 4 years’ purchase of super profit, find ty, capital employed by the firm. fAns.; Capital Employed—z 13,75, 00 i st fev! years. Average capital empty 20. A business earned an average profit of 2 1,80,000 during the last Je Ye by the firm is & 12,50,000. If goodwill of the firm is valued at % 1,60,000 at 2 years’ purchase Of stiper profit, find normal rate of return. [Ans.t Normal, Rate of Retumn—zy 21. A business has earned average profit of % 1,20,000 during the last four years and the normal fate of return in similar business is 15%. If goodwill of the firm is valued at % 1,25,000 at 3 years’ purchase og average super profit, find the capital employed of the firm. tAns.: Capital Employed—X 5 00,039) Super Profit Method when Past Adjustments are Made 22. Average profit earned by a firm is % 1,00,000 which includes undervaluation of stock of % 40,000 on an average basis. The capital invested in the business js % 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. waasq [Ans.: Goodwill % 542.500} 23. Average profit earned by a firm is € 7,50,000 which includes overvaluation of stock of € 30,000 on an average basis. The capital invested in the business is € 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. 19. [Ans.: Goodwill 2,70,000} 24, Ayub and Amit are partners in a firm and they admit Jaspal into partnership wef. 1st April, 2024. They agreed to value goodwill at 3 years’ purchase of Super Profit Method for which they decided to averege profit of last 5 years. The profits for the last 5 years were: Year Ended Net Profit ®) 31st March, 2020 1,50,000 31st March, 2021 180,000 31st March, 2022 1,00,000 (Including abnormal loss of € 1,00,000) 31st March, 2023 2,60,000 (Including abnormal gain (profit) of € 40,000) 31st March, 2024 2,40,000 The firm has total assets of € 20,00,000 and Outside Liabilities of Z 5,00,000 as on that date. Normal Rat? of Return in similar business is 10%, Galculate value of goodwill, fAns.: Goodwill 144,000 Capitalisation Method 25. From the following information, calculate value of goodwill ofthe firm by applying Capitalisation Methot Total Capital of the firm ® 16,00,000, Normal rate of return 10%, ee Profit for the year % 2,00,000. [Ans.: Goodwill —X 4,00.000] 26. A firm earned average profit of % 3,00,000 during the last few years. The normal rate of return of the indus 15 159. The assets of the business were & 17,00,000 and its liabilities were € 2,00,000. Galeulate the goodwill of the firm by capitalisation of average profit. coe {ans.: Goodwill 5000001Chapter 2 - Goodwill: Nature and Valuation 2.35, a7. Aand Bwere partners in a firm with capitals of € 3,00,000 and % 2,00,000 respectively. The normal rate of return was 20% and the capitalised value of average profits was & 7,50,000. Calculate goodwill of the frm by capitalisation of average profits method. (CBSE 20200 {Ans.: Goodwill—€ 2,50,000.) (Mint: Goodwill = Capitalised Value of Average Profit - Capital Employed.) 3s. Puneet and Tarun are in restaurant business having credit balances in their fixed Capital Accounts as % 250,000 each. They have credit balances in their Current Accounts of € 30,000 and & 20,000 respectively. ‘The firm does not have any liability. They are regularly earning profits and their average profit of last 5 yeats is & 1,00,000. If the normal rate of return is 10%, find the value of goodwill by Capitalisation of average Profit Method. tAns.: Goodwill 4,50,000.] 39, From the following particulars, calculate value of goodwill ofa firm by Capitalisation of Average Profit Method: (Profits of last five consecutive years ending 31st March, at 2024—% 54,000; 2023—T 42,000; 2022—Z 39,000; 2021—€ 67,000 and 2020—8 59,000. Gi) Capitalisation rate 20% Gi) Netassets of the firm & 2,00,000. tans.: Goodwill 61,000] 30. A business has eared average profit of € 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by: {Capitalisation of Super Profit Method, and Gi) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits. Assets of the business were T 40,00,000 and its external liabilities € 7,20,000. (Delhi 2013 0 Ans. @ Goodwill 7,20,000; il) Goodwill —X 2,16,000] 31. A firm ears profit of € 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 ©55,00,000 and X 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method. ‘ lAns.: Goodwill 9,00,000 in both cases} 32, On Ast April, 2018, a firm had assets of € 1,00,000 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 6%, the Goodwill of the firm is valued of € 60,000 at four years’ purchase of super profit, find the actual profits of the firm, (CBSE Sample Question Paper 2018) tans: Capital Employed 1,10,000; Normal Profit—X 8,800; Average Actual Profit—% 23,500] THint: € 60,000 (Goodwill) = 4 (Average Actual Profit - Normal Profit] Capitalisation of Super Profit 33. Average profit of a fir during the last few years is € 1,50,000. In similar business, the normal rate of retum is 108% of the capital employed. Calculate the value of goodwill by capitalisation of super profit method if super profits of the firm are % 50,000. in (ces 20200 [Ans.: Goodwill 5,00,000} 34, Raja Brothers eam an average profit of 30,000 with a capital of € 2,00,000. The normal rate of return in the bacinece ig 10%, Using capitalisation of super profit method, workout the value of the goodwill of the firm. Be eee (ween) "(Ans Goodwill 1,00,0002.36 Double Entry Book Keeping —CBSE XII 35. Rajan and Rajant are partners ina firm. Thelr capltals were Rajan & 3,00, 000; Rajant & 2,00,000, Dury the year ended 31st March, 2024, the firm eared a profit of € 1,50,000, Calculate the value of oc of the firm by capitalisation of super profit assuming that the normal rate of return Is 20%, (NCENY, Moline, (Ans. Good ~€ 2.50099) 36. A business has earned average profit of & 8,00,000 during the last few years and the normal fate of return in similar business Is 10%, Find value of goodwill by: (Capitalisation of Super Profit Method and (i) Super Profit Method IF the goodwill is valtied at 3 years" purchase of super profit, Assets of the business were & 80,00,000 and Its external tlabilitles & 14,40,000, (Anse: Goodwill) & 14,40,000; ()& 4,32,000) 37. From the following information, calculate value of goodwill of the firm: ()_Atthree years’ purchase of Average Profit. (i) Atthree years’ purchase of Super Profit. (iil) On the basis of Capitalisation of Super Profit, {iv)_ On the basis of Capitalisation of Average Profit, Information: {a) Average Capital Employed Is ¥ 6,00,000, {b) Net Profit/(Loss) of the firm for the last three years ended are: 31st March, 2024—R 2,00,000, 31st March, 2023—X 1,80,000, and 31st March, 2022—% 1,60,000. {)_ Normal Rate of Return in similar business Is 109, @) @) Remuneration of 1,00,000 to partners isto be taken as charge against profit Assets of the firm (excluding goodwill fictitious assets and non-tracle Investments) Is & 7,00,000 whereas Partners’ Capital is €6,00,000 and Outside Liabilities % 1,00,000, (Ans. Goodwill—()) & 2,40,000; (ll) & 60,000; (Il) & 2,00,000; (iv) & 2,00,0001