I■ CHA PTE R 3

Goodwill: Nature-~ .Val ua1

and~ 1
.
on
. ·.
. LEARNING OBJECTIVES
n,e study of this Chapter would enable students to understa d·
a Meaning of Goodwill · n .
3.1
a Characteristics or Features and Nature ofG d
oo will
a Need for Valuing Goodwill , 3.1
3.2
a Factors Affecting the Value of Goodwill 3.2
a Classification of Goodwil.1
. 3.3
O Methods of Valuation of Goodwil l
3.5
(a) Average Profit Method
-Simple Average Profit Method
-Weight ed Average Profit Method
Q (b) ~uper Profit Method
Shl\'m (c) Capitalisation Method
I;
6,00,ooo -Capital isation of Average Profit
I
- -.c........:...::.J-_~4,25,000 -Capital isation of Super Profit
4,25,000 10,25,000 ➔
0 Difference between Average Profit and Super Profit 3.19 I
I

MEANING OF GOODWILL Ii
to which the
Goodwill is an intangible asset which places an enterprise at an advru:i-tage due 'i
enterprise is able to earn higher profits without putting extra efforts.
11
of normal :I
• I I 11
Goodwill is the presen t value of expected future income that is in excess
of price paid for a business
return on the investm ent in tangible assets or for the excess
value of all tangibl e net
as .a whole over the book value or over the computed or agreed
assets purcha sed. ·
able to
"When a man pays for goodwill, he pays for something which places him in the position of being
- Dicksee
earn more than he would be able to do by his own unaided efforts."
advantages
."Goodwill may be said to be that element arising from the reputation, connections or other
to be expected
possessed by a business which enables it to earn greater profits than the returns-normally
- Spicer and Pegler
on capital represented by the net tangible assets employed in the business."

CHARACTERISTICS OR FEATURES OF GOODWILL

. . .
The characteristics or features of goodwill are: 1,e., 1t 1s not
. e, and has a value,
· tang1"ble asse t, 1.e.,
1. It is an m . physical existenc
· 1·t does not have
. . . •
a fictitious asset. se. Thus, normall y 1t has
.
2· It does not h ave. an existen parate from that
. of . an enterpn
ce se
realisable value when busines s or a part of busines s is sold. ·
 . Chapter 3 • Goodwl
3.2 Double Entry Book Keeplng-CBSE XII outal,le Contracts: Sometimes, a finn has I~ Nature and Valuation 3.3

3. It helps in earning higher profits. ,. f•"

. ,.,,ds
at favourable prices. This Will also ~u...~<>ng-tenn contracts for sale and purchase of
• f . ....<:et profits

II 4. It is an attractive force which brings in customers more frequently to the place of bUs·
5. It comes into existence due to various factors such as locational advantages, fa\ro~;
gv-r r Establishment o Busmesa: B .
'- 1,ot1S\v-e (broader) customer base resulUSlnesstin
teJlSl f . g II\ hiol..-
and goodwill of the firm.
. established for lon
g are
likel
y to have
contracts, brands, trademarks, patents, market reputation, etc. ~ eJ' 1.;gher value o goodwill.
)\11-.e ,... •
"'""' sale and profit ~ •- a r esult, 1t
. .
will
6. Value of goodwill is subjective as it depends on the assessment of the valuer. tage of Patents. Normally patents ·
7. In the context of partnership, it is the value of share of profit sacrificed b 5. ,-d-.allrtaill types of articles. A ~ w h i c h = ~ for the manufacture or production
"fi . Ythe of cee for its goo d Wt·n· r - ~ the neces
. sary patents will. have a better
sacn ang partner.
valll ss to Supp1·ies: When supplies of materials , .
TANGIBLE AND INTANGIBLE ASSETS
Tanglble Assets: Tangible assets are the assets which have phys/to/ extstence. I.e., they can be seen and lou""-' 6- ,-cce f goodwill for a firm which has good arr are difficult to get, there will be a high
..aiue o angements for gettin gu1 Ii
Examples are land, building, plant and machinery, etc. . -"'II. . . If a firm enjoys good reputation f . g re ar supp es.
Intangible AINb: Intangible Assets are the assets which do not have physical existence, I.e., they can~ 01.1al1ty • · f· . or the quality of its products, there will be a
_,, and touched. Goadwil/, patents. trademarks are examples of Intangible assets. or lit 7. d sale and the value o its goodwill, therefore, will be hi
rea y · If firm "· b gh.
AS-26, lntanglble Assets Issued by the Institute of Chartered Accountants .o f India has defined lnta119111e S. ft{arket Situation: a . ~s m a usiness w ~ demand for ~ products dealt in is
asset as follows: ·• higher than the supply, 1t ~ lead to lower capital requirement and higher profit It will,
"An intangible asset Is an ldentlfiable 110.,-mooetary asset, without phys/cal substance, held for use in the ProdUCflon ;ncrease the value of its goodwill.
or supply of goods or services, for rental to others, or for administrative purposes! thus, ....
Risks Associated with Business: If the risks faced by the business are lesser than normal,
9· the business will have higher value for goodwill.
NATURE OF GOODWILL Nature of Business: If the business of a firm is of the nature where the products dealt in
tO. are in high demand although not short in supply, the profit will be higher. It will, thus,
It is a valuable intangible asset. It is amortised over its estimated useful life.
_ increase the value of its goodwill.
Accounting Standard-26 (AS-26), Intangible Assets prescribes that goodwill is not to
p st Performances: The firms earning higher profits year after year, will have better value
be recognised in the books of account unless consideration is paid for it. Therefore
tl. f:r goodwill as compared to firms eamin~ lesser profits or incurring losses with similar
self-generated goodwill is not recognised in the books of account whereas purchased goodwill~
. amount of capital employed. ·
recognised. Self-generated Goodwill is not recognised because its value is subjective and is not
11. Other Factors: (a) After sale services, (b) Good customer relations, and (c) Good labour
evidenced by payment, i.e., amount does not exchange hand. On the other hand, purchased .
goodwill is recognised being evidenced by payment. · relations, etc.

NEED FOR VALUING GOODWILL CLASSIFICATION OF GOODWILL

The need for valuation of goodwill arises: Goodwill is of two types:

1. When there is a change in the profit-sharing ratio. l. Purchased Goodwill; and
2. When a new partner is admitted. Goodwill- . .
2. Self-generated Goodwill or Non-purchased will f hich the firm has paid
3. When a"partner retires or dies. · . that good
will 15 or w
l. Purchased Goodwill: Purchased Good h a business is purchased and purchase
4. When partnership firm is sold as a going concern. r example, w en • bill''" , the difference
consideration in cash or kind · Foal of net assets ("i.e., Assets- Lia ues,,
5. When two or more firms amalgamate.
consideration is more than the v ue will
. Mahagun Business for ~ -~et
6. When a partnership firm is converted into a company.
amount is the value of purchased good · ·
siness }-louse acquifeS 20 00 000 and liabilities
FACTORS AFFECTING THE VALUE OF GOODWILL , Let us take an example. AB Bu ,_,1 were valued at ~ ' ' • ~ soo 000
00 Assets acqllll""' of net assets, i.e., ' '
consideration of i 10,00,0 · t 2 00 oOO paid ill excess ased oodwill-
Goodwill is affected by the factors which increase the earning capacity of the firm. These are: taken over were of i 12,00,000. ' ~will, which is purch g
the b00ks 0if
1. Efficient Management: If the management is experienced, capable and competent, ~ 20,00,000 - i 12,00,000) is towards g oodwill may be _recogni5ed in
. that purchaStd 8 . d useful life.
the firm will earn higher profits as compared to other firms. · AS-26, Intangible Assets prescrrt,est but within the estimate
2. Favourable Location: If the business js located at a favourable place, resulting in increased account and written off at the ear res
custom~r walk-in and, therefore, increased saie and increased profit.
 3.4 Double Entry Book Keeping-COSE XII
Featu res of Purr:h aud Goodwill: \fALU ATIO N OF Gooo w,ll
(i) It normally arises on the purchase of a busine 50 F
ss. iioD -
(ii) Since the consideration is paid for ,if ..... -- is personal assessment of th
(iii) If it is ~gni sed, it is shown in the
it, it may be recognised in the books of aceoun ~..... _,hv,_...
_, 11
d
of gOU" r the metho stated in . evaJuer-.. .
Balance Sheet as an asset.
(iv) Value of Goodwill is a subjective assessment t. #~11ed 35 pe rtners . However, folloWtheingPartner .- "" 18 USUally agieed
thr ship Deed or as per the among the partners.
but it is ascertained ,w hen both pur ~ i,y we pa_ thod·
11i5
ee methods are follow meth~ of valuati
and seller agree to its valuation. ~ e profit Me ' on
. ,-¢rag fit Method; and . ed for valuin g goodw ill:
(v) It is amortised at the earliest but not later
than its estimated useful life. I· rPro
(vi) Value of goodw ill depends upon d
the purchaser's expectation of future profits. i Sll~~ ation Metho :
1
Illustration 1 (Purchased Goodwill). ,_ c,P italisation of Average Profit Method; and (ii)
Ca . . .
Amrit Daily Needs acquired the business of (i) cap
Shri Shivam for a purchase consideratio profit Meth od P1talisation of Super Ptof\t Method.
f 5,00,0 00 paid by cheque. The assets acquired
and liabilities taken over ~re: n Of 1, ":.uierasetJf\der Average P~ofit. Method can be calculated either by:
f I Liabilities:
10,000 Creditors
f
c,ood l Average Profit Method; or
5jtllp e .
5,20,00o Q) . hted Average Profit Method.
7,50,0 00 Salaries Payable
75,00o
··) Weig .
I ., • (ll profit of the firm from its
1,50,0 00 Outst andin g Expenses ineaJlS . business operati Th . .
15,00o profit are not considered. They are not considered ons. us, non-business
Pass the necessary Journal entries. d e,cpense 5 beca mcomes
ood . .
Solut ion: use g will 15 valued o1
Amrlt Dally Needs :busin ess.
JOURNAL • Avera ge Profi t Metho d
Date Particulars (I) StlllP 1e
.
LF. Dr.m c,.ro7 thiS method, norm al profits of the busine :
Furniture Ale
Inventory Ale
Debtors Ale
...Dr.
-Dr.
10,000
7,50,000
- tJpder . ed. Norm al profits are totalled and averag
detef!!Uilu"ltilied by the numb er of years' purcha
se
ss for the specified numbe r of years are
e profit is determined. The Average profit
(such as 1, 2, 3, etc.) to determine the value of
•.Dr.
jslll p . . .
Goodwill Ale (Balancing Agure)
1,50,000 I
goodwill of the busin ess. ·
...Dr. 2,00,000 '
To Creditors Ale the form of formula, it is
To Salaries Payable Ale 5,20,000 111 ·
·
Value of Goodwill= Average Nonnal Profit x Numbe I
To Outstanding Expenses Ale 75,000 r of Years' Purchase
15,000 Normal Profit (also terme d Futur e ~aintcrinabl
To Shlvam e Profit) is determined for each year adjusting
(Business of Shivam acquired for a net consideration 5,00,000 , the past year's profi t for the followmg:
off S,00,000, ,- '
f 2,00,000 being towards goodwill) (i) non-b usine ss profi ts and/o r losses; .
'' I
Shlvam (ii) abnor mal gains (profits) and losses;
...Dr. 5,00,000 .
·To BankA/c .
. (Cheque Issued to Shlvam) 5,00,000 (iii) capital expen ditur e being accounted as reve nue ~;
(iv) reven ue expen ses being accounted as cap1.tal diture·
2. Self-generated Goodwill or Non-purchased expen ,
Goodwill: Self-g enera ted good will is the · g bee
(v) reven ue expen ses not havin n aceounted:' and
good will which is not purch ased for a consi
derat ion but is earne d by the effort s of the st.
mana geme nt (or partn ers). It is an intern (vi) errors comm itted inthe pa
ally gener ated good will whic h arises from · artedb • ess will not match
numb er of factor s (such as favou rable a This meth od is based on the assum ption . th t rofit of a newly st usm
locati on, effici ent mana geme nt, good qualit a P . th . "ti"al years of its operation. Hence
produ cts, etc.) that a running busin ess posse y of the profit of an estab lishe d firm or enterpnse · dunng euu ,
sses due to whic h it is able to earn highe r profits will f being in a position to earn profit m · th
. who purch ases a runn ing busin . ys good or e
Features of Self-generated GoodwiU or Non-purch ess pa
.
ased Goodwill: initial years of busin ess.
(i) It~ gene rated intern ally, gener ally over
the years . • I l'\1rCha5e?
What is meant by numb
(ii) Its valua tion is subje ctive asses smen t of
the value r, being not based on an evide nce.
er of years hich the firm is likely to earn similar
-
(iii) As per AS-26, Intangible Assets, self-g enera Number of years ' purch ase mean s fue number of years ff rts
for w
ted good will is not recog nised as an asset.
profit after chan ge in owne rship . because of the e o put in the past.
 3.6 Double Entry Book Kttplng-CBSE XII
Reasons or Justification for using Average Profit and Number of Years' l'urch~e G 00 dwill Cha11ter3.('"~ ...
fiJld vatue of . -.Natul1!andValuatlon 3.7
Past profits show the trend o f fin an dal performance (Sale and .Profit) which in turn, llldiea..
. ~ 4= eoodwill is calculated by applying the lo .
likely future profits. Buyer of the business would like to estimate future profits for 'IV--."' '/fltle of will' Average Future Maintainable :::g fonnu1a:
profits are averaged . Buyer wouId also like to estimate the number of years business IS ~
. 1i1,..;·
to earn that profit because of the efforts put in the past. · . ~
coad Purchase (as per Step 3). (:t5 per Step 1) x Number of Years'
Steps Involved in Valuation of Goodwill
Step 1: Calculate Normal Profit .
_.,,pie, g
oodwill of a £inn is to be valued at.,... __ .
fi .
fot er--- 6tIJl earned pro ts in the preVioUs fOUr
yio6t•fl'l~oodwill will be valued as follows:
r-~-
~uc,:e Years- n., • ..._ __ -
of four years' average

Goodwill under this ~ethod is c".1culated on average of each normal profit of the Past
considered for calculating goodwill.
y' f16,00o·
rofit =
~ '°
15,000 + 11,000 +'
18 000 ,.
• + ' 16,000
Years- as' 15,000;, 11.ooo;, 18,000 and

Normal Profit (or Future Maintainable Profit) is calculated for each year as follows: ·/..,erage p 4 - • ' 15,000
c;oodwill = Average Profit x Nl.lll\ber of Yeats' Purchase

Proftt/(Loss) of Past Year (Before Adjustment) (Given): = ~ }5,000 X 3 = ~ 45,000.

Add: (i) Abnormal Losses (e.g., Loss by fire, Loss by theft, etc.) ation2- .
(ii) Loss on Sale of Fixed Assets (Since it is not a normal business activity) Jll~s;ara and Zara ar~ partners in a ~
sharing profitl; and losses in the ratio of 3 : 2 : 1. They
(iii) Overvaluation of Opening Stock or Undervaluation of Closing Stock ~ded to take Dara into partnership from 1st April, 2022 for 1/4th share in the profits. For
(Since it would have reduced the profit) deCl urpose, goodwill is to be valued at twice the avera"e ~~---• fi f th . •'---
tl1iS P whichever is higher. 0 -"•UdlpfO to epteviO\ISum:.,
(iv) N~n-recurring Expenses (Such expenses are not expected in future) 1ouryears,
(v) Capital Expenditure charged as Revenue Expenditure ~ annual profits for the purpose of goodwill for the past four years were:
(e.g., Purchase of Machinery wrongly debited to Purchases Account) Year Ended '
31 st March, 2022 48,000;
Less: (i) Abnormal Gains (e.g., Gain (Profit) on Sale of Fixed Assets) 31 st March, 2021 30,300;
(ii) Overvaluation of Closing Stock or undervaluation of Opening Stock 31 st March, 2020 31l00;
(As it would have increased the profit) 31 st March, 2019 42,200.
(iii) Non-recurring Incomes (Such incomes are not expected in future) Calculate value of goodwill.
(iv) Income from Non-trade Investments Solution: CALCULATION OF AVERAGE PROFIT
"iaiedon Past three years' Profits
(As it is not related to normal business activities)
· (v) Management Cost (Partners' Remuneration) if it is not deducted
(-)
Ya ended 31st Ma~h, 2022
Yaended 31st March, 2021
' Based on Pastfour~Proftts
48,000 Year ended 31st Marth, 2022
30,300 Year ended 31st March, 2021
I
'
48,000
30,300
it is the value of their services to be paid in future years)
(As
(vi) Any future expense, like insurance premium

Adjusted Profit (Future Maintainable Pro.fit) for the year

(-)
Year ended 31st March, 2020

Talll Profit (A)

31,200 Year ended 31st Marth. 2020
Year ended 31st Marth, 2019
1,09,500 TotalProfu
\
!Al
31,200
42,200 '
1,51,700
r.nber ofYears (B) 3 NumberofYears lll 4
Step 2: Find Average Profit 37,925
Avaage Profit (A + B) 36,500 Average Profu (A+lll
Add normal profit (as calculated in Step_l) for all the years and divide the total by the number
of years for which profit is determined to calculate the average profit. Four years' average profit 1s er
I

. . high than three years average Profit.

. ,
.
g25 x 2 =, 75,850.
. b e twO times of' 37,925, i.e., 37,.
Therefore, Value of Goodwill will
Average Profit= Total of Profits/Number of Years.
Step 3: Determine the Number of Years' Purchase hen Atfustments are Made).
Illustration 3 (Average
Profit Method w 1 . th ti·o of 2 . 1 They admitted
. and losses in e ra . .
Number of years' purchase means the years for which the firm is likely to earn that much profit Han and Krishan were partners shanng profits this nnmose the Goodwill of the firm
because of the efforts made in the past. It is estimated for valuation of goodwill. It is always . th rofits. For r--r - , fi Th
Shyam as a partner for 1/Sth share m e p f last five years' average pro ts. e
given in the question. was to be valued on the basis of three ye ars' purchase
. o

Pmfits for the last five years were:

 3.8 Double Entry Boole Keeping-CBSE XII

Year
Profit(t)
2013-14
50,000
2014-15
40,000

Calculate Goodwill of the firm afteradjusting the following:

2015-16
75,000

The profit of 2014-15 was calculated after charging~ 10,000 for abnorm~ loss of 8t>ods ~
2016-17
(25,000)
.. I
¾
~
, 11jol'
fl

•P"td'\r.
e)ll
io'tll fnde
c:1iase

st fo
d
verage Profit Method when Adj
5 (J\ d Anita's business on 1st A "'~ts
jll~,.i' p"r se of average normal profit of the 1
years were:
.
°"'111er1.Gaoct..ta,.,__

Pril, '2ln2.
Arr~)
·
It,.,._ •&reed
·-- andValuallon 3 •9

ast four Jean. The to value &oodwill at three

profits of Anita's ..... ~-
uuamess

,,st ,..,re,cti,, 2020

'fe'' t, 2019 "
.. (CBS£ 2019 90.000;
CALCULATION OF NORMAL PROFIT
t) ,,st t,18,..,,,t,' 2021 ' 1.r.o.000;
Solution:
Adjustment I') Normal Profit It) ,,st t, 2022 1-
-.ooo;
Year
2013-14
50,000 ,1st f<l'~er facts are identified from the books 2.2o.ooo.
40,000 + 10.000 (Abnormal Loss) S0,000 ,.no~ year ended 31st March, 2019 an a ..... of •caiunt
2014-15 ,.,.. . g u,.e ' --., wasso\d t .
2015-16
75,000 _~ u,.e year ended ~1st March, 2020, a ll\achine was d a a ~ (profit) of" 10.(XX).
1
2016-17
(25,000) 2- II"'. written off as loss m Profit & Loss Ac~•-t
-,rlf\g w....
esttoyed m accident and" 30,uuu
rv,n •

2017-18
50,000 ""' th year ended 31st March, 2021, firm's assets were not •
. g e .
Total Normal Profit
2.00,000 . 3, !)llrif' prerniurn being f 10,000. It is a regular . lllSUred due to oversight.
,_ct1rance value of goodwill . experu;e, ll\CUned""""'
- · -·, year.

.. . ".
P"'-
~2,00,000 f c,1oiJate u,.e
Average Profit= Total Normal Profit/Number of Years= 5
40,000 . .
Profit!'I
Goodwill = Average Profit x Number of years' Purchase Nom,all'dt«)
'I Ill

= f 40,000 X 3 = f },20,000. .t II I 1111

I Ill ■ 111,1D) \

\
l,91),00Q
Illustration 4 (Average Profit Method when Adjustments are Made). ~ I II I
I Ill
l,ll),000
Ramesh purchased Bharat's business with effect from 1st April, 2022. It was agreed that the I 111
1,20,000
I

.firm's goodwill will be valued at two years' purchase of average normal profit of the last three &,611,000
years. Profits of Bharat's business for last three years ended 31st March, were:
2020 t 1,00,000 (including an abnormal gain of f 10,000); · Total Normal Profit ~ 6,60,000
Average Profit = Numberof Years • ~ 1,65,000
2021 f 1,10,000 (after charging an abnormal loss off 20,000); 4
2022 t 85,000 (including non-business income of f 5,000). Goodwill = Average Profit>< Number of Years' Purchase
Calculate value of the .firm's goodwill. = ~ 1,65,000 >< 3 =~ 4,95,000.
Motl: Insurance premium towards insuring assets is a regular/recuning expense.Theiefore. it Is deducted from
Yean- Adjustments Normal Profit (fJ the profit for the year ended 31st March, 2021.
Profit for the year ended 31st March, 2020 (t 1,00,000 - f l 0,000) 90,000
Ulustration 6 (Average Profit Method when Adjustments are Made). .
Profit for the year ended 31st March, 2021 (t 1, 10,000 + f 20,000) 1,30,000
Om, Shanti and N amo are partners sharing profits and losses equally· They agree to admit Dev
Profit for the year ended 31st March, 2022* (t 85,000 - f 5,000) 80,000 . be al ed at four yeaIS' purchase of average
for equal share. For this purpose, goodwill is to v u .
. Total Normal Profit for last three years 3,00,000
profit of last five years. Profits for the past five years were: . ·
Total Normal Profit March. 2020 3\s\ March. 2021 3\st t.\atth, '20ll
A verage Profi t = - - - - - - - - t 3,o;,ooo t 1,00,000 YearEnded 3lstMarch,20\8 31stMarch, 20\g
31st
\AO lll0,000)
Number of Years ·70000 \,00,000 ' J'/,1.l
Proot/(lossl ~ g\: cBi1ted to Trave\ling
I Goodwill = Average Profit x No. of Years' Purchase 30,000 . . •
purroased and were wron Ye
, = f 1,00,000 X 2 = f 2,00,000. On 1st April, 2021, 5 cycles costing~ 20,tnl werechar ed @ '15% p.a. Calculate value of goodwill.
I Expenses. Depreciation on cycles was to be g
"'For the valuation of goodwill, Net Profit will not include non-business income.
 3.10 Double Entry SoOk Keeplng-CBSE XII

of"~ •,1
Average Profit. Total
~ I l l ~ - ~ Chaii.1.~Maluo. andVlluallon3.11
Solution: Calculation of Nonnal Profit: Normal Profitl(Loss) <'I
,30,cn,
Yl!Ortnd«J
3JstMarcfl. 2018
30,000
70,000
vatue of Goodwill - Average Prost • l\l._, ~ -, 57,soo
31st March. 2019 1,00,000 · • ' 57.500 -·-mer of y
31st March, 2020 1,40,000
• 2 •' 1,15,cn, ears- Purchase
31st Mardi. 2021 (1 ,0S,000) (Loss) (Note) •115trnents: . . .
31st Mardi. 2022
.c--
2,35,000 ,µI air expenses that should have\...._
Total Normal Profit 1-
ieP ..ense but accounted as capital --=ndebited
to Profit It, __
Total Normal Profit f 2,35,000 • , 471000 ,s eJCr-
pep•~ ..,ciation·wrongly debited to
expenditure
ProntltLossA
....,. Aa:ount
-Loss to in.-..._ by
--......., 'SOIXXl
"
lS0,000)
-,ded 31st March, 2021 ~ 50 000
Average Profit • Number of Years 5
Z. IXOunt for the '
Goodwill • Average Profit.x Number of Years' Purchase "{eat "'' · , • 12/10()
·ustlllent to be made in profit for th • l0/12)
.. . • "47,000 X 4 • " 1,88,000. . /.dl e Year ended
d. stxnent to be made for depreciation f 31st Much, 2021
3, : : ~arch, 2022 (12% of ~ 50,000)
Notr.
Cafcu/at/OTI ofAdjusted Loss for the year ended 31st March, 2022: "
1,20,000 1
or the year ended

Loss for the _year ended 31st March, 2022 20,000 pr11fllback of Simple Average Pt-ofit Method
Less: Cost of Cycles wrongly debited to Profit and Loss A/c 1,00,000
prawback of the above method for valua"uonofgoodwill'18
5,000 idered since each years profits are given..,,..,~, . that bend of profitability 15 not
Add: Depreciation @ 2596 p.a. on "20,000 (cycles) 1,05,000 c0t!S h · · fi --,_..... wei.ghta- ,.,....,_~
USU'ess that as nsmg pro ts and one that has . 0-,~onisnotmadebetween
Loss for the year ab falling profits.
ruustration 7 (Average Profit Method when Adjustments are Made). (ii.) Weighted Average Profit Method .
Luv and Kush are partners sharing profits equally. They admit Shubh into partners}u
equal share. Goodwill was agreed to be valued at two years' purchase of average profit J&ii lt iS a Dlethod under which weight is assigned to each
.....,tlllined (as is determined under Simple Aver M year. Normal profit for each year is
c•- . age ethod)andmulm-,\ied "th ·
· laat , dweight to determine the value, i.e.,·Weighted Profit. W · n1-., wt theass1gned
foUI years. Profits for the last four years were: . gh eJ."',ted Profit-ras well as the wein'hl:5
Normal Profit/Closs) ro are totalled- T otal of We1• ted Profit is divided by the........_, .
Wl4l of weights
I:,"·
to detennine Weighted
Year Ended 70,000;
•

31st March, 2019 · ' AVerage Profit. futureWe1ghtage 18 assigned to the profit Of recent year as 1t
• More .
. .mdicates the most
- 1,00,000;
31st March, 2020 .·
55,000 (Loss); }ikely profits m ·
31st March, 2021 I'
1,44,000. Valuation of Goodwill
I 31st March, 2022
The books of account of the firm revealed as follows:
Step 1: Calculate Normal Profit

1. Firm had abnormal gain off 10,000 during the year ended 31st March, 2019. Norxnal Profit is calculated as is discussed earlier.
2 Firm incurred abnormal loss off 20,000 during the year ended 31st March, 2020. . , ~ote: Refer Page Nos. 3.6 and 3J _for <;afadalion cf Normal Profit. \
3. Rep~ t~ car of f 50,000 was wrongly debited to Vehicles Account on 1st June, 2020. · .
[
I St~p 2.: Select the Weight to be Assigned (given) to each years profit
Deprecation was charged on vehicles @ 12% p.a. on Straight Line Method.
Calculate the value of Goodwill. j.
·
• , r. 1
•• . I Step 3: Calculate Weighted Average Profit
Solution: CALCULATION OF NORMAL PROFIT ' ·,1. Profit for each year (determined as per Step 1) is multiplied by the weight assigned for
r-:-~ ~-.---:----;:-;::~~ ~ ==.:.:::..::____,,--------- 1 " that year and find the p~oduct ~eighted Profit). . 1
;---t--....:..P=:
Yea-;rniEnded
~ ;;;:;;- ~ _:_:_+--~N~orm~al~Pro~fit~t'~> ]
rofit}~(Loss:;:):_:l'>: !.__f-~·AtJ~justm~~en~ts~• (f) I : : , ,

31st Man:h,2019, 70,000 , (10,000) · · ', 60,000 ' 2. Total the Weighted Profit (Product) and also the weights. ·. .
1,00,000 20,000 , 1,20,000 3. Divide the Total of Weighted Profit (Product) with the total of weights.
31st March, 2020
' \ ~• • '

(55,000) (45;000) (1,00,000) I •

I

31st Malth, 2021 Total of Weighted Profits

31st Man:h, 2022 J,44,000 . 6,000 1,50,000 Weighted Average Profit= Total of Weights ' ' ; ·· ·
., • :. f P
2,30,000
 3. 12 Double Entry Book Keepln g-CBSE XII -

Step 4: Find the Value of Goodw ill

Joyed: Capita l employed
1 ll~pto determ ine the value of ;::;a ~bl\~
~ 3 -~
llatu.. anc!Valuatlon 3 •11
In 6-,e film
in ~t~p 3) by the ' Numb er of Years• l¾r
111 Will. Capjbll
Multi~ ly Weigh ted Averag e Profit (as determ ined
a, 1t ts '
e,,f;,.JJ,i- by:
i,~~ Sl'l~::s Side Appro ach: enip ~ 111ay::'!: ' busn- . 1t
It is the value of goodw ill. Expres sed as a formul
1
led from the
Goodw ill • Weigh ted Avera ge Profit x Numb er of Years' Purch ase. · e,I' t,1,i,il• EJf\Ployed a Capita l+ Reserves_
ntaIVill, -·, exi,,t;.... .
C'.ood'
(il Ol'ital - Non•tr ade Investrne if""'·
ge Profit
Reaso n or Justifi cation for using Weigh ted Avera ts Side Appro ach: . . -•g111.1t-,ebo<>lcs-FtditiowiAsae1s
trend of financ ial perfor mance which is the trend of profits . Profi tse
Past profits show the ') ,.sse 1 f;rnplo yed = All Assets (except r~-.
releva nt as compa red to earIi er years. Therefi ~
by an enterp rise in recent years is more (ii Ol'ita Assets ) - Outsid l~Wi ll. "Non,.r-....a_
is follow ed under the metho d. ore, It\~ e 1abiliti "'"'"' lnvest...- and Fictitious
weigh tage should be given to recent profits which "'°l _ super Profi t x N umber of Years' Pu~
. - •""'ts
better as compa red ~o Simpl e Avera e,
Weigh ted Avera ge Profit Metho d is consid ered·
tage to the profits of recent years. This metho d is pa! ProQi ~ s investments are specified to be trade
~
Metho d as it gives more weigh
(down ward) trends . C\l~l'I) 1
:..d' unes
. =-::
..::::•
-~- - -'-' ~~ls.~
NorHiade~~ lnvabnm
effective when profits show rising (upwa rd) or falling ,.,.__· .
Illustr ation 8. TRADE INVESTMENTS AND N
Profits of a firm for the last five years were:
ON-11A
._..-tmen ts are those investments that Ore IIIOde
D& I ~ -~
In IIIIOlher ··· -.• - .~
_..,. ,,..,---
tllteprlse far 1111 lilrlhlninm ~ own
31stMarch, 2020 31stMarch, 2021 31stMarcti, ~
Year 31st Mardi, 2018 31st March, 2019 "':"'~- . . .
. 50,000 · . 36,0Qo those Investments that ore made
m 40,ooo 48,ooo 60,000 ..,,..- e fnvestments are
Profit
~ purpose of furtherance of own business. _toeam lWlrlUt bylnllll!Stlngup1us funds and
years' purch ase of the weigh ted a\'
Calculate value of goodw ill on the basis of three ·
5 respec tively to the profit s for years erage When Trade Investments are Given) ·
profit after assign ing weigh ts 1, 2, 3, 4 and . ended ple 1 (
2022. , : .
capital emplo yed by the above two approaches Wlth
31st March , 2018, 2019, 2020, 2021 and ~aJJI
. the help of fo\lowing Balance Sheet
caJctJlate

=
CALCULATION OF WEIGHTED AVERAGE PROFIT "
Weighted Prafit "> ~ " Assets ,
Year Ended Profit ro Weight
D=Bxc ,...ital A/CS. land and 1111ik1ng
Goodwi- 1,50,000
8 C ;;;- \ ,00,000
A
.. JlstMa rch,20 18 40,000 . : ,, ,. ;, 40,000 .-ar l ,00,000 2.00.000 lnvestments (Trade)
50,000
96,000 ~ I Reserve 90.000 Stock
31st March, 2019 48,000 / • I .:-'·
70,ooo
I • 1,80,000 ~ creditors 90.000 Swldty Debtms
30,ooo
• • •
31st March, 2020 . 60,000 ' • -'l ' '
- 10.000 Cashatllanll
4 . ; ·. .. , .2,00,000 ()i,tstanding expenses •·
3 I st March, 2021 S0,000 Deferred Revenue Expenditure:
36,000 s 1,80,000
1-- - - ~ MvertisementSuspense
10,000 ,
3 Jst March, 2022 3,90,000
1S 6,96,000 3,90.000
Total

h dA p ii Total of Weighted Profits f 6,96,000 = f 46 400

u, .
neig te verage ro t .=. --- --- -"' --- - 15 I •
Solution:
~ _ Total of Weights
x
' Purchase Capital Employed
Goodwill = Weighted Average Profit Numb er of Years (i) Liabilities Side Approach: ~
= f 46,400 X 3 = f 1,39,200. Partners' Capitals: 1,00,000
2,00,000
2. Supe r Profit Method Aman
~
Simil ar amou nt of capital employed yields differ
ent profits for different enterprises. When a Bhaskar
90,000
of the capital emplo yed, it is calle4 normal 2,90,000
simil ar type of business earns profit as a perce ntage Add: Gene ral Reserve
norm al retur n on capita l employed.
return. But a buyer 's advan tage lies in the excess of the . 10,000
The excess ofactua~laverage profit over normal profit is known
For example, a firm has capital empl oyed off 10,00,
as super profit.
000 and its retur n on capita l employed is
Less: Fictitious Asset (Advertisement Suspense)
Good will '· - 30,000
- 40,000
l ,':JJ,000
simil ar busin ess is 10%, i.e., f 1,00,000,
15%, i.e., f' 1,50,000. Norm al retur n on capital empl oyed in Capital Empl oyed
firm has super profi t off 50,000 (i.e., f 1,50,000- f
1,00,000).
ne 1
 . Ola
J. 14 Double Entry eool< ,ceep1ng-CBSE XII average capital employed la . Plet3.Gaoclwln:
..,etlfl'et ..,..fit iS earned during the ye COllsidered for_, ~and\/a\uatlon '3.\5
(ii) Assets Side
,..,Approach: 50v· tl'llt p•- ar and tapi
-eulatin
tal of Assets Side)
All ~ .' • 0 • - ~ - (Advertisernent Suspense) ·
10 000
'
• •..!'
•II
i,,--
def
v,
ta1 t!lnployeci
un this method is calculated "'· 1111dtip1..,_ J_~
of goodw\11 on the ·
........ges from time
Less: F1ctibOUS ,..,_.- 30,000. ~· c11ase· .,,ng supr, . to time.
Goodwill 90,000
sundry Creditors 10,000
~ ,P"~, tiJlS goodwill under this method profit IDlth the agrml n11mbtr of
Outstanding Expen5f!5 . - .- - 1~ rfot cal""a , the steps
Capital Employed
. . _, E .
i--' Trade Investments are taken as part. of capital
.
empI~.
~
~l steP
ca1cU1ate ,Average Capital Employed
1: .
are:
0perung Capital Employed
18
follow .
B.
While Clllcu/Jzhng o,p,t,,, mp "!I"""' · · ~!lf!d %...~ - +Q<>sin Ca .
2 g pita\ l!.mploYed
Non-trade Investments art excluded. . ··,
,.,.,_ Non trade Investments are Groen). capital Employed = Capital+ Reserv . .
Example 2 ( r:'""' - .--i b Li bilities Side Approach and Assets Side Appro ~L - Non-trade 1n es - Fictitious Assets "'
Calculate capital emplo.,~- Y a a.... , , ~tments - Goodwill"" any)
following Balance Sheet: \
IJabjlltieS ' Assetsand Building
Land . ,- • All Assets (except Good
Fictitious Assets) _ Ou ~ Non-trade Investments and
capital Ales: Gc,odwfll d . tside Liabilities.
Amrlt 2,00.(XX) 4.00,000 Investments Z: calculate adjuste profit, i.e., actual avera e -
...:2==-i
SUdhlt
General ReserW
.0<! ·1,80,000 Stock
1,so,000 sundry DebtorS
20,000 Cash at Bank
SteP
,
iS adjusted for
abnormal gains and lOSSes'f:J_ profit. Profit earned by a firm for the
1,een incurred. The profit so detennined 15
: if any and teCUrring expenses
totalled and is avera ed.
that:-
~
SUndryc,edlton
()ulJtallcflng Expell5l!5 Deferred Revenue Expenditure: calculate normal profit or return on
steP 3: following formula: , average capital employed by aw\ymg the
1-------1 Advertisement Suspense
7,80,000 Normal Profit= Average Capital 'Employed" Normal Rate ot Return
100
Note: Normal Rate of Return _means the rate of
Solution: similar industry. · return normally earned by other firms In the
Capital Employed
(i) Liabilities Side Approach: t i
step : calculate Super Profit, i.e., Actual Average Profit- Normal 'Profit.
4
Partners' Capitals: 2,00,000 Step 5: Calculate value of goodwill as follows:
Amrit 2,00,000 . 4,00~ Goodwill = Super Profit" Number of 'lea.rs Purchase
Sudhlr
Add: General Reserve
~ · Illustration 9 (Super Profit Method). . .
5,80~
1,00,000 A firm earned net profits during the last three years as:
Less: Investments (Non-trade)'° · 20,000 Year I II I• Ill
Fictitious Assets-Deferred Revenue Expenditure
(Advertisement Suspense) · I Profits ro l 8,000 10.000 12,000
60,000 . 1,80,00,
Goodwill The capital investment of the firm is~ 60,000. Normal return on the cat1ital is 10"/o. Calculate
4,00,00, value of goodwill on tbe basis of three years' purchase of the average su~ t1rofit for the last
Capital Employed
(ii) Assets Side Approach: three years.
7,80,ool
Total Assets
Less: Fictitious Assets-Deferred Revenue Expenditure Solution: · . ~ 18,000 + ~ 20,000 + ~ 22,000 _ ~ 10 OOO
(Advertisement Suspense) . 20,000 Average Profit= 3 - ,
Goodwill ' . 60,000
Normal Profit = ~ 60,000 x 10/100 = ~ 6,000
lnvedstments (Non-trade)"" 1,00,000
Super Profit = Average Profit - Normal 'Profit
~
Sun ry Creditors u~~
!standing Expenses 20,000 3 80 00.l = l 20,000 - ~ 6,000 = ~ 14,000
Capital Employed -~- ~00,~ Goodwill = Super Profit x Number of '{ears 'Purchase
•Unless Investments
are therefo are stated to be trade mvestments,
ded cted · __:.-.;::::
tbey are taken to be non-trade investments. 1beY = l 14,000 x 3 = l 42,000-
' re, u to calculate Capital Employed.
 3.16 Double Entry SOOk Keeplng-CIISE )(II ,

ruustratlon 10 (Su,xr Profit Meth

Alok and Aakash are partners in
od;~~
hnr Adjustments art Made).
M
.
Enterprises. They adnut Ashish as
-
.,~slJ'.,
jv pto
. (Super Profit Method, Un"-.
1:101\ 12 -'llllllUlt'
fit earned by a firm Is' 75 000
. . ' W'-•~
~ 3 - r ~ -·
ton Of Stoe1t)
·
-.Ma\\nanci\/alua
tlon 3.'7
at 3 years' purchase by Super Profita~
,.~se ~jS. 'fhe capital m~ested in the . '"""_includes .
1st April, 2022. They agreed to value£ last 5 years profits. The profits for the last five ~eth~le~
which they decided to take average O ~ ,~-::iate g ia,
• _.,._g,e o0dwill of the £inn on the b ~ 7,IX)~uation of stock.of" 5 rvv,,
-11 of 5 times _,,, lrld the ,vvu on
~
>'ea.:_"'11
Year ended 2,00~ (fncludfng gain of~ 25,000 from sale of fixed asset);
c,I"" ActUal Average Profit . , 75
000
the SUper l"Qn\al nte of mum is 7"1..
tiOfl: ' + ' 5 000 profit,
Jtst March. 2018 • (lncludlng abnormal loss of~ 50,000); 111 Normal Profit • Can;ta1 ..,_ ' (undervalued
I. JJst March. 2019 .
3 I st March, 2020
7 000
t, o.
2. I O,OOO;
50 r· '-lllPklyed
• '7,00,000" 7
Super Profit a Actual A:.
Stock) • " 80,000
Onvestinent_) "Nomw ~
/loo., 49,000 te of Retum/100
3 I st March. 2021 2,J0,000;
:verage Profit - N
. March. 2022.
list 2,S0,OOO,
. f and normal rate of re tu mm
. s1m
. ii ar bus·
' • ~ 80,000 - ~ 49 OOO Ortnal Profit
Capital employed 111 the firm is 15, 00, 000 , . mess isl Goodwill a ~ 3l ' •' 31,000
000
,
"5., 1,55
Calculate value of goodwill, II\ dervaluation of stock decreases net profit. H .000.
Solution: CALCULATION OF ACTUAL NORMAL PROFIT ~ l)rt ence, It Is added to
1. Profit m Adjustment It) Nonna tlon 13 (Super Profit, Overvaluation of Stock) determinektualaverageproflt.
J)oStta
Year Ended
2,00,000
(25,000) , 1,7 I e profit earned by a firm is ~ 2,50,000 which. .
J JstMa/dl.2018
J,70,000
S0,000 . 2,2 ,.&¢tag ge basis- Capi·ta1.uwested m. the..._,..: ____ . ,. includes overvQluation
_, of stodt of~ 1:0 000
JlstMaidl.2019 2,1 avera . "'-"'Ull:55 JS, 14,00.(Xl) and '
2,10,000 ot' }ate goodwill of the firm on the basis of 4 tim the normal rate of return is 15%.
31st March, 2020
2,30,000
2,3 caJCll , . es the super profit.
31st Maid!. 2021 2,5
2,50,000 50Jution:
31st Maid!. 2022 10,8 Average Profit = ~ 2,50,000
overvaluation of Stock = ~ 10,000
Total Normal Profit f 10,85,000 _ f 2 17
. ActualAverageProfit= NumberofYears 5 - , ,000. ., ...,,al Average Profit = ~ 2,50,000 - ~ 10,000 111.1
~1,•- \' ,Ote) =~ 2,4.0,000
Normal Profit= Capital Employed ,u, n-:vestment) " Normal Rate of RetumllOO
2. Ca/cu/aHon ofNormal Profit:
Capital Employed = f 15,00,000
Normal Rate of Return = 10% = ~ 14,00,000" ~=~210000
Normal Profit= f 15,00,000 x 10/100 = f 1,50,000. •l
. 100 ' '

I 3. Calculation of Super Profit: ·

Super Profit= Actual Average Profit-:- Normal Profit
:: t 2,17,000- t 1,50,000 = t 67,000.
. ·
d.if. !
Super Profit = Actual Average Profit - Normal Profit
= ~ 2,40,000 - ~ 2,10,ocio =~ 30,000
Goodwill.= Super Profit " 4 ·
· 4. Value of Goodwill:
Goodwill = Super Profit x Number of Years' Purchase = ~ 30,000 X 4 = ~ 1,20,000. •
; = f 67,000 X 3 = f 2,01,000.
Note: Qvervaluation of stock is deducted as it increased the net profit

~
illustration 11 (Super Profit Method), , I
Average n~t profit o! Ho~e Depot expected in th~ future is f 54,000 per year. Averag~ capital I_ illustration 14 (Calculation of Average Profit).
employed zn the busmess 1s f 3,00,000. Normal profit expected from capital invested in this c1as ; On 1st April, 2022, a firm had assets of~ 3,00,000 including cash of~ 5,000. 'Partners' Ca-pita\
. of business is 10%. The remuneration of the.partners is estimated to be ~ 9,000 p.a. I
Accounts were ~ 2,00,000 and the Reserve being the rest. ll the normal rate of return is 10%
Find the value of goodwill on the basis of two years' purchase of super profit. · :' i and the goodwill of the firm is valued at~ 2,00,000 at four years' purchase of super profit, find.
I
Solution: · · ~ t ;
Average Profit 54,000 : the average profit of the firm. ·
Less: Partners' remuneration 9,000 Solution: Goodwill = Super Profit x Number of Years' Purchase
1' ·

Normal Profit on capital employed (f 3,00,000 x 10/100) 30,000 39 OOl

Super Prpfit 15,00! ~ 2,00,000 = Super Profit x 4
=
..;_!--

R ,Goodwill, be'.ng ~o years' purchase of S~per Profit= f 15,000 x 2 = f 30,000.

lo~fiers "form,~~er~,~onbzs ~educted to determine normal profit because it is the value of their seruiaS Super Profit = ~ 2'0~,000 = ~ 50,000
rm ""nu,mg usmess. . , . I
 soak ,ceep1ng--CBSE XII
3.18 oauble EnlrY _...,.. N nnal Rate of ReturnJi t,etween Average Profit a....-1.Goodwll:
N nnal Profit • Capital EJnplor- " o ()()0 00 11iif•''.,,e and S111141r Profit Ma\uni -v.luallan ~-\9
o • f 3,00,00o" 101100- f 30,
Profit - Normal profit It ls -.age of tha
Super Profit • Average I agieed years. IIOlfflll Plllflll al PIil llla'lha
"50 ()()0 • Average Profit - "30,00o
, "50 OOo + "30 OOo. "so,00o. .
..-ci1Return Nonna! rate al l9lum la Plllfl. -a1-....,,._nafflal
calculatlonof--.iei-:.--~llll\1N~g;m.;-:~-:-:-------
Average Profit • ' ~ssum~ to be nil. n,us, capital employed Is equal
~
c;apttal Avenge capital - ~ al - . i la alNldaNd w111a
whllecalculatlng~ la llalCllnsldlnid =--wllll-.,,..._
I. Hotr. As (JIIISlde 11abllftieS are not given. theY are to T ,
J. ll'IIIIIJePlal'll -.a,pllal
Jiluslration 15 (CPJcuflltion of Average Profit).
. .
of, S,OO,OOo whereas liabilities are: Partners' Capitals_
M/sHi-Techindiahasassetsand sundry creditors-f 90,000. If normal rate of
General Reserve-f 60,~ al ed t f
and goodwill of the .6nn JS v u a
90 000
'
' I
t3.5o '
at 2 years' purchase of super profit~ la~
' d a~
\~
-,-......-ofYa)Ulnt
....-.::...
~
-talisation Method
Awoge proftt la "-'l
Mdhod.Su!lerl'n:lt
Methodofvaluatlorl~~
.. ,.... ...
= ~:-;:!'. - .. o...-.......
llrlilln .... - . . ~ II talren 11M

~~
IAllhadahal111llanalgDOIWI.
1
rofit of the fi.nn. ,- CJP •'-e capitalisation Method, goodwill
. ~---'will a Super Profit x Num·ber of v,ears' p urchase . ., c1er u• can be valued •
P ll~ capitalisation of Average Profit; or USU\g two methods:
Solution: v<JVU
t 90,000 a Super Profit x 2 (1) ·talisation of Super Profit.
f90,000 · ii) o,p1
~ = f 45,000
( •talisation of Average Profit ·
Super Profit =
(i) catn....;.,. method, goodwill is calculated 1... ded 1.
Capital Employed= Assets- Outside Liabilities (Creditors)
,111der .,...... . .
v .,valuation) m the business from the capitalised 1
v,
uc ing capital I d .
fflll' oye lt.e., Net Assets as on the
. = f 5,00,000 - f 90,000 = f 4,10,000 o,
(late Capitalised value of the business is d : ~ of am-age profit on the b11Sis of Normal Rate
of _Retufll·nnal rate of profit. .· . muned by capitalising average profit earned
Or
at the no .
= Partners' Capitals + General Reserve for cUlating goodwill under this method ' the done --r~ are as to\lows:
cal
= t 3,50,000 + f 60,000,= ~ 4,10,000 . calculate average normal profit
step 1z:• calculate capitalised value of the firm bv usin th t __,_ .
step , g e orm\ll4 given below:
Normal Rate of Retum = 10% 10 Capitalised Value of the 'Busin~ = Average Profit x 100
Normal Profit = t 4,10,000 x 100 =t 41,000 Normal Rate ot Return (Profit)
If a firm eams a profit of ~ 16,000 annually and firms normally earn 10"/o, the total
Super .Profit = Average Profit - Normal Profit
capitalised value of the firm will be~ 1,60,000 ti.e., l 16,000 x 100/10).
Average Profits Super Profit+ Normal Profit
. . = f 45,000 + f 41,000 = f 86,000.
Step 3: Determine the value of Net Assets, on the date of valuation of goodwill.
Net Assets = All Assets (other than goodwill, non-trade investments and fictitious
I
illustration 16 (Calculation of Capital Employed). . I as.s ets) at their current values minus outside liabilities.

I Average profits of a firm during the last few years are f 80,000 and the normal rate of retumia
a similar business is 10%. If the goodwill of the firm is f 1,00,000 at 4 years' purchase of super
Step 4: Goodwill = Capitalised Value of the Busine$ las pet Step 1)- Net AS!i1i!t5 las pet Step 3).

Illustration 17 (Capitalisation Method). -

A firm earned ~ 60,000 as profit, the normal rate ot return being 10"/o. Assets ot th.e ~ ate
I profit, find the capital employed by the firm.

Solution:
(CBSE 2fllll

l 7,20,000 (excluding goodwill) and Liabilities are~ 1,40,000. find the value ot goodwill b-y
Goodwill at 4 years' purchase of Super Profit = f 1,00,000

I
Capitalisation of Average Profit Method.
Super Profit = f 1,00,000/4 = f 25,000
Solution: Average Profit x 100
Average Profit - Normal Profit = Super Profit
Total Capitalised Value of the Firm = Normal Rate ot Return
Normal Profit = Average Profit - Super Profit
= f 80,000 - f 25,000 = f 55,000 H,o,OOOxlOO .. H,,OO,OOO
'" 10
Capital Employed = 100/NRR x Normal Profit
=f 55,000 X 100/10 =f 5,50,0Q0.
 3.20 Double Entry Sook Keeping-CIISf XII . .
late Average Profit of pasty ~ 3 -~....__
ts_ Uab1Uties calC\l eara, i~ three · ·--anc111a1uatloo\ 3.21
Net Assets • Total Asse 000 • " 4 80 000 · ",: C\llate super Profit, I.e., Average p ., to five
• f 7,20,000 - f 2, 40, ' ' .
511• cat . rof\t - Ill 'Years. .
Goodwill • Total Capitalised Value of the Fll'Il\ - Net A.•• _ 511V , : dwill - Super Profit ,. ~ O?rnal Profit.
- " 6,00,000 - " 4,80,_000 - " 1,20,000. ~ s: Go0 Nonna\ R a ~ .
511V where average profit is " 60 OOO· rn
Illustration 18. . . d •gner firm. Their fixed capitals wer ., 1
eicatt'P ~ (i.e., " 60,000 - " 48,000) N~ and the norrna1
Yash and Karan were pa e
rtn rs in an mtenor es, . t e,
d't balances in their curren accounts oft 6,Oo.&.
and :r 4,00,000 respectively. There ~ : : b:.iance of f I,00,000 in General Reserve 4,0()~
f~\ i,e f t:Zzo,OOo (i.e., t 12,000 x 100/10). l1\'lal Rate of Return~;~ is" 48,000, super profit
~I i,e fl, investments are specified to be T d · Thus, value of goodw\1\
and ii' 5,00,000 res~vely. Th:!::::tted Radhika into partnership for I/4th share in ~ ~ Ut ff"'
•...: 1)11
1ess
ments. They
ra e Inv
are, therefore, deducted to ,_ .. estlnents, they are ~
did not have any liability. They f th firm for the last five years were t 5,00,000. CaJ e ~ ,,..
1
,,vest · ca....,,ate Captta1Ernl)loyed_considered to be Mon-trade
of the Brm. The average profits O ~talisation of average profits method. The norm%'4! u. ·011:Z.O, · .
value of goodwill of the firm by capt al ra'4!'" .,,11sttau fit of the firm is " 1,50,000 Total tan
return in the business is 10%. - - . . -- (CBS£~ JV pro • 4 00 000 . gi"ble .
,.~seliabilities are ' , , . In the same type of ~ssets tn the lirm are " 14.00,000 and
. Goodwill » Capitalised Value of the Firm - Capital Employed -"'l issde ·tal employed. . ess, the nonna1 rate of_._ __ .lS 1"""
Solution: · p fit" 100/Normal Rate of Retum . , oll caJ'l . •~•""" u ,..
Ca italised Value of the Firm • Average ro . , . of tile a1ue of goodwill by Capitalisation of Su
P · • f 5,00,000 x 100/10 » t 50,00,000 · · - caJcolate " . per Profit Method.
. lo ed _ Yash's Capital+ Karan's Capital+ Yash's Current A 11
50 j11tio : Capital Employed= Total Tangible Assets- Ou . . ...
Capital Emp Y + Karan's current Account+ General Reserve . ~
= " 14,00,000 _ ~ 4 00 tsi.de liabilities
= t 6,00,000 + f 4,00,000_+ 'f 4,00,000 + ~ 5,00,000 + ~ 1,00,~ Normal Profit= Capital 'E.mploy~d ~ .. ~ l0,00,000
- f 20,00,000 , · . Onnal Rate of Retum/100
10
- . -- " 10,00,OOOx -="100000
Goodwill = 'f 50,00,000 _ t 20,00,000 = t 30,00,000.
100 ' '
Illustration 19. . • al · · th · C -~al · Super Profit= Average Profit- Nonna.1 Profit
Bharat and Bhushan are partners in a retail business. B ances m eir . ap1 and Cllrretit = " 1,50,000 - " 1,00,000 ., " 50,000
Accounts as on 31st March, 2020 were: C ·· Goodwill= SuperProfitxlOO "SO,OOOxlOO
Capital Account urrent Aceount
Normal Rate of Return = 10 =~ 5,00,000.
Bharat , f 2,00,000 f 50,00Q
f 2,40,000 f 10,00Q <Dr) JIIUS tration 21. .
Bh h b sine5S has earned average profit of " 1,00,000 during the last few years and the normal
Th::~earned an average profit off 90,000. If the normal rate of return is 10%, find the Val~e A/of return in similar business is 10%. Find out the value of Goodwill by:
I of goodwill.
Solution:
., ra_ Capitalisation of Super Profit Method; and ·
~~ Super Profit Method if the goodwill is valued at 3 year:: purchase of super \>rofit.
. Average Profit x 100 { 90 000 x 100 = { 9 ~ts of the business were ~.10,00,000 and its external liabilities" 1,80,000. lDelhi 2011)
Capitalised Value of the Busmess = Normal Rate of Return ' 10 ,00,()00
Solution: . _ ·
Capital Employed = { 2,00,000 + { 2,40,000 + { 50,000 - { 10,000 ={ 4,80,~ (i) As per Capitalisation of Super rrofit Method:
Goodwill = { 9,00,000 - f 4,80,000 = { 4,20,000. . SuperProfitxlOO _ ~18,000xlOO -HSOOOO
(ii) Capitalisation of Super Profit , Goodwill = Normal Rate of Return - 10 ' ' ·

r Under this method, goodwill is calculated by capitalising super profit at the normal rate of
return. Thus, as a first step Super Profit is determined on the same basis as is determined under
(ii) As per Super Profit Method:
. Goodwill = Super Profit x Number ofYears' Purchase
Super Profit Method, which is capitalised at the Normal Rate of Return to determine the value = ~ 18,000 X 3 = ~ 54,()()(}.
of goodwill. Worldng Notes:
For calculating the goodwill under this method, the steps are: 1. Capital Employed = Assets - External Liabilities
Step 1: Calculate Capital Employed (i.e., Net Assets as on the date of valuation) of the firm: = ~ l 0,00,000 _ ~ 1,80,000 8,20,000. =", ,o
Net Assets= All Assets (except goodwill, non-trade investments and fictitious assets) Normal Rate of Return -•82oooox - ="82,000.
100 -'\ I I

l Normal Profit = Capital Employed x 100

- Outside Liabilities. p fit_ Normal Profit
3. Super Profit = Average ro
Step 2: Calculate Normal Profit on Capital Employed by using the following formula: = ~ 1,00,000 - ~ 82,000 18,000. ="
Normal Profit= Capital Employed x Normal Rate of Return/100.
 3.22 Ooulw fnhY B o a l < ~ XII Net Assets• Total Asaeta ~ l -~
(exdudin -~-"""--
goodwill of M/s Sharma ~ g goodWil\) _ Ou - - - '1,23

//
Illustration 22.
From the 1onowing information. caJc:ulate va)ue
(i) At three years' purcflase of Average Profit.
Of

.'
Gup~ Goodwill •
• ' 11,00,000 _,
°' 11,81,818 - ' :,000 •°'
1
10.00,ooo lside Uab\\1t1et,
,00,000 •" 1 ..,1.818.
D

(ii) At three years' purcflase of Super Profit.

(iii) On the basis
of Capitalisation of Super Pr!3fit.
~
I. (iv) On the basis of CapitaJisalion of Average Profit.

Inji:m,ultion:
~ R Code for Addin
~ ona1 lll_~~ ~
. .
. .
(a) Average Capital Employed - f 10,00,000- . . .
(b) Net Profit/LoSS of the tirm for the p~t yeus: 2020 - f J,60,000 (Profit); 2021-t
(Profit); 2022-f 2,.70,000 (Profit). IA()~ -
(c) Normal Rate of Return on capital is Jl'X,. · . le choice Questions lMCQs)
(d) Remuneration to ~ach partner for his service to be . treated as a charge o~
r,tllltiP __-,a/tematlve:
f 2,500 per month. Proti1, _.,,arflt'""___ .
(e) Assets (excluding goodwill)-f U,00,000; Liabilities-\' 1,00,000. )C'"- ~lch of the tollowlng statement is Correct?

1· c;ooctwlll ls a fictitious asset.

Solution: (al Goodwill ls a wasting asset. lb) Goodw\11 \u current
(i) Calculation of Goodwill at three years' purchase ofAverage Profit: (cl ld) Goodwill asset.
f 1 60, 000+ "1,40,000 + \'·2,70,000 f 5,70,000 ,~,...s arnount that a finn gets over and abollethe Is an inlanglble asset.
:a, - - matlcetvalue of assets
Average Pront O ' 3 3 . "' t 1,90,~
= --..:..:..::__· (al profit. atthe~afsaleallbbusiress1s
l Reserve. lb) Super Profit.
Average Normal Pront = f 1,90,000 - Remuneration of Partners (C ld) Goodwill
'fhe term 'Number of Years' Purchase' means
= f 1,90,000 - (" 2,500 X 2 X 12)
S. (al The number of years during which the purchaser of .
I =- f 1,90,000 - f 60,000 = f 1,30,000 are likely to arise In future. Goodwill expects \hat the pro6t due to goodw\\\
Goodwill = Average Normal Profit x No. of Years' Purchase (bl Number of years in which goodwill is purchased.
!(: = f 1,30,000 X 3 = f 3,90,000. (cl Number of years for which goodwill purchased w,.11 not help the firm · ""'
I
(ii) Calculation of Goodwill at three years' purchase of Super Profit: (d) None of the above. . m eam.~ ~mi\ar proli\s.
Normal Profit = Capital Employed xNormal Rate of Retum/100 • capital employed by•a partnership
"' . firm ls, s'oo '000· Its average profit ls, 60,000. ·
.,, = f 10,00,000 X 11/100 = f 1,10,000 Is similar type _of business 1s 10%. The amount of super profit ls . The normal rate of tetum
Super Profit= Average Profit- Normal Profit (al ' so,ooo. lb) , 10
" 000 ,ooo.
= f 1,30,000 - f 1,10,000 = f 20,000 (cl ' 6, • "- ld) , 56,000.
Goodwill = Super Profit x No. of Years' Purchase ·11 . b . firm. .It Intends to value its Goodwill nverage
, Ra) & Associates is a partnersf\\p •. profit for the past S years ls
5
will,S0,000,an
'1 be . 1s emgvaluedat3years'purchaseofaverageproflt, vaue
d Good w1 I ofGoodwll\ofthefirm
= f 20,000 X 3 = f 60,000.
(iii) Calculation of Goodwill under Capitalisation of Super Profit: (a) '4,S0,000. lb) , tS0,000.
Goodwill= Super Profit x lOO le) , 3,00,000. ld) ' 6,00,000.
Normal Rate of Return 6. Following were the profits of a firm for the last 3 years:
. · · = f 20,000 x 100/11 = f 1,81,818.18 or f 1,81,818. Profit l')
Year
(iv) Ca/culahon of Goodwill under Capitalisation ofAverage Profit: 2019-20
2020-21 2,40,000 (after char in abnormal loss oH "10,000)
Goodwill= Total Capitalised Value of Business - Net Assets . ,
· 2021-22 3,60,000 lexcludin '( 1,20,000 a able on the insurance of machine ) ·
Total Capitalised Value of the Firm = Average Normal Profitx 100 Goodwill of the firm on the basis of 4 year5 purchase of the average profit for the last 3 years will be
Normal Rate of Return
(a) '( 12,00,000. lb) 't 10,so,000.
t 1,30,000x 100
f 11,81,818.18 or f 11,81;818
(c) ~ 12,80,000. ld) None of these.
11
 w--' 19 ----a,SE XII
aouble EntfY soolc ,._..., .-,,,4wflf ls useful when
3.24 ••-!hod of ca1cUlat1n11 vu- (b) Profits show a trend etth prern are partners In a retell bust c....,._3 . ~ .._.
_ . p,o/11,... er rfsi "'•"d . ness.11a,___1n,.-..
1• Weighted A ,nllar~111e,-.rs. namer- Cd) Profits are slmllar In au the "911, zwere• -1ne1eun-._____ 1ne1~3.25.
<•J p,o11tsatenot sl,na,,e,-.,and,owertn• rs was f 60,000. The normal yield ori ca lleari. 1• ,oz
~
C.Pllal~«l --nts•anl\1UAald\,
/I (cJ p,r,/ilS ate ~---ss over the last live yeavested In the business Is f 5,00,000. A.n-, Pita1 1 ~
__,of•,,,.,..,- 096 ,._. Capita 11n . oullt ~f!I l.OO.ooo c..._ Account~
a. Avrrage l"w"• IS est1tnar«l al I ,..... rs super profits will be Of
~ rned an average profit on 90 000 If lAO.ooo
such• t,usJnnSJ ,-rs· p u ~ of lasl 5 yea {b) f 1,80,000.
50.000
~ fir11' ~~sation Method. ' ' the IIOnnal rate al \0.000 \0..)
lfttls~°" Cd) fl,50,000. . i,yCapftaoOOo '9tutnll\O'M..l'lndtt,eva\ueofGoodw\ll
(. J f 1,00.000. I f42 • n,
• 000. f Goodwill the formula for calcu ating goodwill
I (cJ f :;:pltallsltlonMettiod
,. U~p,otits~i,yttierate f tum
of valu•:::::im. ' (b) Average profits multiplied bi,~
Cd) Averageprofitsdividedbyth ~Qf
(al f ,· ,o,000
(cl ' ·on·
rorrnat1 ·
Id) "UO.ooo
I "l.lO.OOO

, ,,., ,-,counts of Partners Naresh and VI,._._ •

,~~ Su,_,protitsdJVldedb)'rherate'!, 8re00 ~ Normal Rate of Return Is 15% and profit ~fateQf ~ 1 ' c,pltal d Vikesh-, 50,000 and , 40 000 - .. --i: 5/Y.).IIOQ each· .,_,_
,o. ,.., ,-- - • - - In the firm IS ' ' ,
em,,..,~,,
Total C,apltal
,
as per Capitalisation Method woul
d be •or..__
. ~'I! ~ 11aresh annts-' 25,00O; AdvertlsementSuspen...::..-;-·~•7,
' r e s ~ - .,uank __ , , - - In Cum!nt '-ccounts of
~ , 0 ...,_,_ ,-..-........, •
stlfle . ....-.. lS.OOO - -• ............,,11 , so.ooo;
f l,20,000. Value of_... (b) f 1,20,000. ,,.,ve on the above information, Capita\ Employed for the •
eased 90 ooo. .
I
(I} fB,20,000. (d) "4,20,00Q. , purposes of valuation a11 Goodw\11 w111 be
(c} NIL ..._ N mal Rate of Return Is 10%. Assets of the firm are f (a) f 10, '000 lb) t \0,75.000.

=
_....,;,off!,I0,OOO. rne or . p fit "llb 11 ,00.n.... (c) f 10,00, . (d) t \OA0.000. .
, ,. A firm eams ""vu• oodwill by Capitalisation of Average ro w1 e '""II
rorrnation.
.
I llabllltles f 1,00,000. Valueofg (b) f 10,000. ' "iii JO· In f Assets side of the Balance Sheet~ 25 00
(a} f 2,00,000, (d) f 1,00,000. -rotal.;kesh-t 75,000 and t 25,000 resl)eCtlve~;
/I andestrnents-t 25,000; Profit and Loss Account lOeb"tH
~::._s:ia- In Cunent Accounts of Maresh
I
(c) "s,ooo. Profit Method goodwill /s calculated by: . , , 5.000. 8/Y.).000; Goodwlll t \ ,00,000; 1rade
I 12. Under Super '
(a) Number ofyears' Purchase x Average ro .
p fit 11111
sase
d O n the above information, Capital Employed for th
e purposes of valuation of Goodw\11 will be
(b) Number of years' Purchase x Super Profit. (a) t 16,SS,O00· lb) t ,s,ss,ooo.
I (c} Super Profit + Normal Rate of Return.
'd' Super Profit - Normal Profit , ·. ' ·· ·
(cl , 11,ss,ooo. lei) t ,4.85,ooo.
[Ans.: 1 • (d); l. (~); 3. la); 4. lb); 5. la); 6. lb); 7. (.b); a.. le); 9. le); 10. lc); l l. ld);
12• lb); 13. lb); 14. le);
'' ' f'"' 000 whereas Liabilities are: Partners Cap,tals-f 3 so OOo 15. (d); 16. la); 17. la); 18. la); 19. le); 1.0. lei)~
13• Mis. Supertech India has assets o ' 5,00, • . ' • , G....• .

;II Reserve-? 60,000 an un ry

I
. firm Is va u a ed ,
d S d Creditors-? go ooo. If Normal Rate of Return 1s 10% and GoodWi1; --""ll

.
' h A P fit f th fi
t f 90 000 at 2 years' purchase of Super Profit, t e verage ro o e rm will
(b) ~86,000. · ·
-
be
1Of 1ht A5sert10
. n-Reason Based MCQs
.
below are two statements (in each question), one labelled as Assertion l1') and other labelled as Reason ll\):

I
I (a) f 46,000.
(c) f 1,63,000. ·
(d) t 23,000.
% A t f th fi .
Given sertlon (A): G~odwill is a~ Intangible asset because of which an enteq>rise is like\-/ to earn higher profits
1• As without puttmg extra efforts.
ed f 60 000 as profit, the normal rate of return being 10 . sse s o e rm are f J,2ono. Reason (R): Goodwill is_ an intangible as~et ~s It exists but does not have a physical existence. "-\so, if
14. A ti rm earn ' I fG d ·11 b Ca ·t 1· · "'IIV
(excluding goodwill) and Liabilities are f 2,40,000. Find the va ue o oo wt Y pt a 1sat1on of AYerage an enterpnse enjoys goodwill, 1t will have repeated custome~ and will also attract more
Profit Method. customers due to which sales will Increase and thus the proti~
(b) t 1,80,000 In the context of above two stcitem_ents, which of the following is correct?
f 2,40,000
(a)
f J,20,000
(c) (d) t 60,000 (a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct eiq>\animon of Assertion l.A).
15• Jagat and Kamal are partners in a firm. Their Capitals are: Jagat t 3,00,000 and Kamal t 2,00,000. During the (b) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion V,.).
year ended 31st March, 2022 the firm earned a profit oft 1,50,000. The normal rate of return is 20%. Calculale (c) Assertion (A) is correct but the Reason (R) is not correct.
the value of Goodwill of the Firm by Capitalisation Method. (d) Both Assertion (A) and Reason (R) are incorrect. . .
(a) f 2,00,000 (b) f 5,00,000 A sertlon (A): Self-generated Goodwill is recognised In the b?<>ks of account on reconst\tut\on of ~ft'~
(c) "3,50,000 (d) fl,50,000 2, s because amount is exchanged between the gaining partner or partners and sacn ""'9
16. Tangible Assets of the firm are f 14,00,000 and outside liabilities are f 4,00,000. Profit of the firm is~ 1,50,000 partner or partners. . . . nised in the books
and normal rate of return is 1096. The amount of capital employed will be . (R)• According to AS 26, Intangible Assets, Self-geneiated Goodwill ,s not recog
Reason • 'df ·t
(a) f 10,00,000 (b) f 1,00,000 of accounts because the value is not pa, or , .
(c) fS0,000
t hich of the following is correct?
(d) fi0,000 (CBSE201l! In the context of above two statemen s, w h R n lR) is not the correct explanation of
17. Average Profit of the firm is f 6,00,000. Total tangible Assets in the firm are f 28,00,000 and Outside Liabilities (a) Assertion (A) and Reason (R) are correct but t e easo
are f 8,00,000. In the same type ofbusiness, the normal rate ofretum is 20% of the capital employed. Calculate Assertion (A). . ect nd Reason (R) is the coned explanation of t>ssettion l"-).
the value al goodwiU by Capitalisation of Super Profit Method. (b) Bpth Assertion (A) and Reason (R) are con a
Ca} f 10,00,000 (b) f 5,00,000 (c) Both Assertion (A) and Reason (R) are not correct. ect
(d) Assertion (A) is not correct but the Reason (R) Is corr .
(cJ f 1.50.000 (d) f 15,00,000
 3.26 Dou""' Enr,y B o o l e ~ ,en ...... t1me of firm's reconst1tut1
Go(ldWfll 15 r,ec,,ssal'Y at .. - on ~ ,eJtf of obc>W two stoternem,. 0-....,, 1 .
.J. ~ tllJ: v.Juarlon of o,mpensate the sacrificing partnerS for gaining Profit • ha "a. ,. rfl6'°" ~ (A) and Rea-. (R) : lchot11ie,.___ --.,,..__"-allan 1.27
pa,rne,s /la\11! IO t which 15 recognised In t he books of account ~-
// R - - tRJ: Goodwfll Is .,, lnta"91~ asse
paid fat It. ts. wf,ICh of the fol/owlfl9 Is cor,Ktl
If all a
~ (DI
,.sseerflOO (A{A)1• and Reason (RI ar• COneq
""••, 90"",tlon
onlY Assertion (Al tIs correct.
,.ss
~--;::_'l lsCOriwcff
·-1111 II Ille eon.t
but the
_ ~ a t ~ IN
"--- 111) ls · - 1h11 conect _,___ •
tn tM conttxt ofat,a,w twO ~ conect but the fleaSOl'I (R) Is not the correct explanatlori (cl sertlon (A) Is no correct but the - .........Ian of
ta) AssettlOn CA) and /leaSOfl (R) ate a,nect and Reason (R) Is the correct explanation Of-¼... (ell AS Reason (R) Is
Assertlofl CA) and ReaSOl'I (R) are of llss.':_~
~, ~
I (b) Both
(c) Assertion (A) Is correct
(d) Both Assertion (AJ and Reason
but the Reason (R) Is not correct.
(R) are incorrect,
le asset and 1s recognised as an asset only when c
· I\ - - - · · - -- - - -- ' 1. (b):2.ld):3.
-scan QR Code for Additi - --- ·-· . _· : ) ;4.(bl;L(b);L(b);7.~)l
4. ~ (A): Goodwfll ls an lntanglb twO willing and Independent persons. onsld~11.._ basedMCQs . - ~ - , . . ; . ; . . ; _ _~
exchanged hands t,erween . """'
rescrfbes to recognise goodwill as an asset only wh
RHSOn tRJ: AS .16, ,nrongl/JM Assets P en coils
~
.
has been paid for It. Answer Type Questions
,ements. which of the fol/owing Is correctl ·•11iiii st,o rt
:t,e.:::::::::.7,;'::J:::::; (RJ Is not the correct explanation Of
(R) are correct but the ReasOn '/It'/ c;oo<1will.
(b) Both, Assertion (A) and ReaSOn (R) are correct and Reason (RJ Is the correct explanation Of ~
- ~oe . sta
1• IJI'" artJ three c,rcum nces other than (I) adm
~ 2008\
(c) Assertion (A) Is correct but the Reason (R) Is not-correct. ~~ ,_ siaie th of a partner, when need for valuation ISSlon al a new Pilltnel
(Ill) dea tVIIO features of Goodwltl.
,...,. artJ
°'
900dwlu at ii firm • I l l ) ~ ol ii l)artnef and
may arise. IDolhl 2016\
(d) Both Assertion (A) and Reason (R) are Incorrect. J. .,.. . . ...eant by Purchased Goodwi111
s. Assertion (AJ: Average Profit of a firm Is f 5,00,000. capital employed In the business Is " 50 , wt,at IS'"
._ t 15 meant by Self-generated Goodwlll?
Normal rate of Return Is 896, Super Profit will be " 1,00,000. ,00.oo:,_l
5- ~ t Is ,neant by Average Profit?
Reason (RJ: Super Profit Is th~ excess of Average Profits over the Normal Profit~. Capital err,
6- What are 'Super Profits'?
" ,oo,ooo and 896 is the expected retum, expected normal profit will be " 4,oo,r:iOniJ Is
50 1, : t is ,neant by Capitalisation of Average l'Tofu?
•~
Ulelhl 2011 C)
normal profit Is f 5,00,000, Super Profit will be " 1,00,000.
9, What Is meant by Capitalisation of Super Profit?
In the context ofabove two statements, which ofthe following is correct?
Assertion 9, WhY is (;o<>dwill considered as an Intangible asset but no .
(a) Assertion (Al and Reason (R) are correct but the Reason (R) Is not the correct explanation of
10. t-k>V'I does 'Nature of Business' affect the value of 900dwit a fictitious asset? U>olhl. M. Foreign 2009)
(b) Both, Assertion (Al and Reason (R) are correct and Reason (R) is the correct explanation of As . ~ II
(c) Assertion (A) Is correct but the Reason (R) Is not correct ~~ 11 • t-k>V'I does the factor 'effic!ency of management' affect of a furn?
t2- HoW doeS the factor 'quality of product' affect t h e ~Goodwill of a fmnl
(FOftign, Al 2011, CBSE 20191
(Delhi. Al 2010\
(d) Both Assertion (A) and Reason (R) are Incorrect. 13' HoYI does location affect the GoodWill of a business'
11 II
_of flnn? \Delhi, Al 2010)
I 6. Assertion (A}: Capital Employed in a firm is t S,00,000 and rate ofretum is l 0%. Average profit of th .
t 50,000. As a result, Goodwill valued at 3 years purchase of Super Profit will be nil e~_k
value of Goodwill at three years purchase of Average Profit will be f l,50,000. w."""91
,._ HoW does the market situation affect the value of ~ I I of
tS. I f I I · a flnn. 1
16- Give the formu a or ca cu at'.on of tioodwill by 'Capitalisation of Average Ptolit'.
\Al
2010
, Foreign 2009\
I.Delhi 2011)
.l,Delhi, Al 2012 C\
Reason (RJ: Super profit of the firm is nil because average profit is f 50,000 and expected return on 17, Give the formula for. calculation
. "'- of •.>Upet Profit Method'.
of Goodw\11 by 'Capital·isa""n \Delhi 2012 C\
employed Is t' 50,QOO. Since both average profit and Return on Capital Employed iscapltal ,a.Enumerate two main steps mvolv.ed in valuing Goodwill according to Sui,er Profit Method.
· . super profit is nil. Thus, value of Goodwill by Super Profit Method is nit Value of Good=~
3 years purchase of average profit will be f 1,50,000 (t 50,000 x 3). at
EXERCISE
In the context ofabove two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanati Average Profit Method
Assertion (A}. . · . on of
• Goodwill is to be valued at three years purchase of four yea!S' average profit. Profits of the fum for \ast
(b) Both,~ (A) and Reason (R) are.correct and Reason (R) is the co;ect explanation of Assertion (A). 1
four years ending 31st March, were:
(c) Assertion (A) 1s correct but the Reason (R) is not correct.
2019-t 12,000; 2020-t 18,000; 2021-t 16,000; 2022-" 14,000.
(d) Both Assertion (A) and Reason (R) are incorrect. l ~ Goodwill-" 45,000.1
Calculate amount of Goodwill.
7• Assertion (A}: Ave~ge ~ro~t. of a business is f2,00,000, Assets of the business are f 20,00,000 and
:z. Profits for the five years ending 31st March, are as follows:
O~,d~ U~b1/1t1es are f 3,60,000 and Normal Rate of Return is 10%. Value of Goodwill by Year 2018-t 4,00,000; Year 2019-" 3,98,000; Year 2020-t 4,50,000; Year 2021-" 4,45,000 and·
Cap1ta/,sat1on of Super Profit is f 3,60,000.
Year 2022-~ 5,00,000. .
Ruson (RJ: Capital employed is f 16,40,000 (f 20,00,000- f 3,60,000) Normal Profit is f 1 64 000 (f 16 40,000x Calculate goodwill of the firm on the basis of 4 year;' purchase of S years' average profit.
1096
J. ActufGoodalA~rage Profit is f 2,00,000. Thus, Super Profit is f 36,000. C:a~italised at 10%, i; · · lNCERT, Modified\
~Goodwm~ 17,S4,400~
va1ue o wd/ comes to f 3,60,000.
 3.28 ~ Enr,y soolr ~ X I I • of th- )'HI'S' purch• •" of averag" Profit Of tti.

3
goorlWIII on rh" t,asl (olfoWS!
,. Qlcula"' .,.,.,. °'ur Match. wft/dl """"' ..
----,-7.:'::::----
2020 2019 lliii\l!I!. , .,,zz--
f the previous three years • nclecl 31 1\
praflt1 ';,.,fit '( 30,000 (after debiting loss Of
t so,000 (Includes voluntary reti
,:;ct,,-...,
byrw.,"
~
3

<IQ,,,_
·Goact..wi:11atur.-Valuatlon ~.21)
.
- ~
- l'Nr
liw~)"Y '.::;:::.:,ij
~"'. .-""' 22
2022-T_:___ 2021000 ,s.oo,000 4 00 000 (L
• • oss) 13201 8
,. LOSS relTtent - . , _ : " "1•
.nl1.- fit'( 1,10,000 (lncludlng a !lilln (pr..&.l _ -~ • - llald"
15,00, •llo~ •• pro vn, Of" 30 ,._ 1,10,QQQ).
Pro/its m . &00,000 [Ans.: G00cJw111.._~ ~ t,JlO-- he value of goodwlll. """' on the sale of fixed
, te t
111
as1e1s).
sharing pro/its and losses equally. They tak lo,OQ c,1' urchased Jyoti's business with effect from ~ Goodwtll----' l,20,000.\
re .,,.,rne,s In a lirrn future pro/its. For this purpose 90 e ll.... ~ f.Jra~9 P hree financial years ended 31st March '" ~I, 2022. Profits .i......,
I 4.
An
nu,
Baby and (Mtan • .-
partn«Sfllp from 1st,.,...
£-'L 2022 for 11S
th sJ,are In the
__,i, of the prev1ous
ar l00'11 of the a.,..,.ge annual "'-; goodwill for the past four years were:
h ' Od\Nir, ""D i..
three or four years, w lchever Is hi
9her.
Is ,,_,:,
"'I
,. ...,. 1,st t • 1 00,000 (Including an abnonn 1' were:
.,,-
z0lO
: ' ' a gain of" 1
: t l ,25,000 (after charging an abnormal loss 2.Sooi.
by ~ · • business to,
·
n,,. annual profits for the purpose Profit m
•
z02
1
: t 1,12,s00 (exclU<llng t 12,soo as Insurance pr::
25.oooi.
lum on firm's fll'opc,t,--now to be lnsuted).
Year Ended 2,88,000; 2oll te the value of firm's 9oodwill on the basis of two
YQB' Pllrthase of lhl! ~ p,oflt of tt,e last
r 31st March. 2022
31st March. 2021
1,81,800;
, 1,87,200;
c,1culayears. l
t11re" 8abU and Charu are partners sharing profits and
,.i,haY, are of profit. For this purpose, the value of
lhw.: Goodwi~ 2,25,000.\
I?5ses equally. They agree to admit Oaman to,
tO. ee1ual sh of average profit of last five years. Theseg~ill Is to be calculated on lhl! ~ of fout ,,ea~
31st March, 2020 2,53,200.
31st March, 2019 . [Ans,: GoOdwJJJ-· purchase P lot the YQr ended 31st MaKh, -
c,odwllL ~ 2 27 2018 2019
Calculate the value O f 9 f e and half years' purchase of the av ' ~Sol· 2020 2021 lOll
__...,.~11 on the basis o on erage IYI 1,50,000 3,50,000 S rvv.
5, Calculate the value of fmn's gouum ,. 1 00 000 profit for the second year was twi· PrOfit .. profttsfLOSS 1" ' 00,- , 7 ,10.000 \5,90,000)
fit fo fi,st year was , , , • ce th "'
the last three years. The pro r r rofrt was one and half times of the profit of the second e ~ t April 2021 , a car for ~ 1,00,000 was purchased and d blted
th
of the fi,st year and for the ltd yea p [Ans.: Goodwill-, ~ - - on 15 depr~clation Is to be charged @ 25% p.a. Interest of ., e10 ,,,.,.to 'Travelling Elq,enses 11.ccount. o~
3 .hlCh rne for the year en d e d 31 st March, 202_1 and
..... ' · ,uvu on Mon-trade Investments Is ctedit
. ·~~ tO lnCO 2022.
fr sharing profits and losses In the ratio of 2 : 1. They deci I
calculate the value of goodwill after adjusting the above. ll'ns.: Goodwil~ ,40,000_
6. Purav and Purvl are partners In, ath ";;are on 1st April, 2022. For this purpose, goodwill js to be ded lo 9 1
take Parv Into partnership for 1,4 s h. h . Val~ Bhaskar and Pillai are part~ers sharing profus and losses In the ratio of 3 : 2. They admit ~nilla Into
fit of the previous four or five years, w re ever Is higher. The
at four times the average annua1pro ded 31st March, are: . . ag~ 11, ershlp for 1/4th share m profit. Kanlka brings her share of goodw\l\ In cash. Goodwill for this pufl>OS"
profits for goodwill purpose of the past five years en . . partnbe calculated at two years' purchase of the average normal profit of past three years.~ of the
2021 Is to hree years ended 31st March, were:
Year 2018 2019 2020 2022 last t ·
15,500 10,000 16,000 15,00o 0-Profit , 50,000 (including profit on sale of assets" S,OOO).
Profits (f) 14,000 202
,-Loss, 20,000 (including loss by fire~ 30,000):
[Ans.: Goodwill-, 56,s~.) 202
Calculate the value of goodw/11. claim received" 18,000 and Interest on investments and
2022_profit , 70,000 (including insurance
Dividend received ~ 8,000).
Average Profit Method when Past Adjustments are Made
·Calculate the value of goodwill. Also, calculate goodwill brought by Kanlka. · ·, .
7. Asin and Shreyas were partners sharing profits and losses in the ratio of 2 : 1. They admitted Shyam as a [Ans.: Goodwill-~ 66,000; Koniko shall bring I/4th of~ 66,000, i.e.," 16,500 os Goodwill.\
partner for 115th share in profits. For this purpose Goodwill of the firm was to be valued on the basis of three . sumit purchased Amit's business on 1st Apr\\, 2022. Goodwill was decided to be 'lalued _at two 'jears'
years' purchase of last five years' average profit. Profits for the last five years ended 31st March, were: !2- purchase of average normal profit of last four years. The profits for the past four yea!$ were:
Year 2018 2019 2020 2021 2022 31st March, 2019 31st March, 2020 31st March, 1011 31st MaTCh, lOll
Year Ended
Profits (f) 1,25,000 1,00,000 1,87,500 (62,500) 1,25,000 80,000 1,45,000 1 ,f/i'J,000 l,OO,OOO
Profits({)
Calculate Goodwill of the firm after adjusting the following:
Books of Account revealed that: . '31st t-Aarch 2019.
Profit of 2018-19 was calculated after charging f 25,000 for abnormal loss of goods by fire. (i) 11 of ~ 20 000 was debited to Profit and loss l\ccount for the year ended ' . d

[Ans.: Goodwi/1-"t 3,00,000.] (ii) :b;:;:ss::swas sol~ in the year ended 31st March, 2020 and gain tprofit) oH 25,000 vm cred1te

I. Madhu and Vldhl are partners sharing profits In the ratio of 3 : 2. They decided to admit Manu as a to Profit & Loss Account._ fi ot Insured due to o'lersight. Insurance
2021 assets of the rm were n
partner from 1st Apri' 2022 on the following terms: · (iii) In the year ended 31st March ,
OJ Manu will be given 215th share of the profit premium not paid was ~ 15,000. \Ms.~ Value of Goodwill-~ 2,82,500:\
Calculate the value of goodwill.
(II) Goodwill d the finn will be valued at two years' purchase of tf!ree years' normal average profit of the firm.
 ~ l , Gcioclwia:
3.30 Double Enll )'IIO OI< ~ ,m
th me last five years - re:
15' :rt~, 11 2022, an
existing firm had
s ,000 on that date. The ti asset, Of,
75.000
Matln- Valual lon 3.31
had 1 ~ lnclucnng Cash of , 5.OOO.
1, O~r,t t,alance of ,: 60,000. If Nonna; "'Rate Of Return °''
10.000 Wlllh
.
Its u~dlton
Welgh tltd Avera g• p,ottt M• od ... ,ct, for M h, 1 "''.:"...ed a years' purchase of supe, Pr<>flt, find Is 20!(, - ~ C.pta\ kcount s
.,.ded Jlst ..,. JlstMarch.21120 31st arc 2021 3151 tl""::..ro at (our ~ Profit CJOodw\11 of the fmn 11 ...iuec1 at
// u. Pro/ib of• firm rr,, ttw yHI'
YNT&>Md JlstMMC A.21118 JlstMa, dl.
21119
J0,000 2S,OOO
rs' purchase of Weighted Avera e~..zq
~~ ( z41"'- [Ans.: Capftof Empt
~ 10.ooo; No1111a1 Profit--
Pat - of the """tlncJ "'"'·
' 14.IIOO; Super Profit- ' 6,000:
A11erog ........_ '
-10,000 z4,000 e • •um • Nonna, Profit
i,asls of three yea rofits ror years ended 31st Marc9e Pr~ rofit of a firm during theoflast few
+ Super Profit • " 20,000.1
Pro/Its (fJ ___,.,,,,,,,, on the
[Ans.: Value of G h, i01 8 S ...,,ge P 1()'II, If the goodwi ll ..__ Years Is " 2.0o.000
Calculate value of ir--· and s ~
to the P ""' firm Is , 2 and the rtonnal
of retum In a similar
4 Oodw it~ 15• ~ ,..... s IS ·
,,_ _,.is111es ployed by the firm. .SO.ooo at 4 Years' IIUrchasel'ale
assignin g -'!,hts I , 2. J, of super Polit. fmd the
I 2020. 2021 and 2022.
nd Daman .,. partners sharing profits! ~
the ratio of 60 : 40 and for the
000
respect
. .
last four )le
ively. The annual accounts ha ars ~ :-...
lie
ll° ',

si....:
h.. ~
"
p1tal ern

r pro
(It Meth od when Past Adjus tm
. ents ilre llll11de
!Ans.: Capital E m ~ n,1s,ooo.1
t«. Raman a al If S0,000 and If...,, ·"'"'1 \
been getting •nnual y/MieS rtners' yfarieS : Sllf"I e profit earned by a firm Is" 1,00,000 Whl Undervaluation ol _...._ of•
,.vera9 basis. The capital Invested In the b I ch Includes
_1( 1,O1,000 and 2022- lf 1,30,00
0.
following net profit before chargi~OOO; 2021 Is " 6.30 ........ , 40.000 on an
1 ~ partnership for 114th share In profit (withou t i,, ,age goodwll I of t he fi rm on the basis ofus5ness ti .000 and the normal rate ol retum Is S%•
Year ended 31St Mardi. 202o-lf • ' al'l)I ~ ,ve te \Al 201s C\
d to ~se of weighted average profit of last three . caicuIa . mes the super Pl'Ofit.
to t:;ars ~
On lst Aprlt 2022. Zeenu Is admitte
Goodw ill 1s to be w,lued at four 1:~':~.
2 and 3, the greates
.
t
.
weight being given
{Ans.: GOOcJ wm~ last ~ P
rofit earned by a firm Is " 7,50'000 .....
•tat · ""
lch
Includes ~-
lAns.: Goodwl ll---'
-• ..na1uatlon ol stock ol,: 30.000 on an
S,42,S00.1

partner s' salarle5); Proftts to be wel9 ....._ ,. yerage basis. The cap1 investe d In the busines s Is•
7,2~ , 42.00 000 and the nonnal rate ol mum Is 15%.
Calculate the w,Jue of Gc,odwl/L 1 r · ye,age '
• goodwill of the firm on the basis of 3 ti mes the SUl)ef profit.
c,1,ulate
' Supe r Profit Metho d d Benu Is f 10,00,0 00 and the market rate of
Interest Is l S'lf, !Ans.: Value of Goodwll~ 2.70,000.1
1/ a;ach. profit for the last three years were If 3,00,000, If 3,60 · ~ d
Amit are partners In a firm and th f!'f admit laspal Into h .
A.pnl, 20ll. They
se of fast th •OOo ~
15. The capital of the finn of Anu} The ., b an paftner s Ip w.e.f. lst
be valued on the basis of two years' purcha J5, Ar11 d to value goodwill at 3 years' purchase of Su ' Ptoftt M ~ for which they decided to awrage
salary to the partnerS Is f 60,000 . fi ree ,..._ agree f last 5 years. The profits for the last 5 yea:
f 4,20 ooo. Goodw ill of the finn Is to
.,.. Calculate the goodw ill of the rm.
(CB••· ""I
profit O . were:
• [Ans.: Good will~ 1 ""' loi~ Net Profit ~}
average super prom. 0 ~~ year Ended
1.S0,000
e, the Proflt
. fl which they had invested If 50,000. n an averag s "'ert
31st March, 2018
1.80,000
had a rm, nt I
In the Industry is 1596. Goodw ill is to be valued at four years'p urr1.~ 31 st March, 2019
16. Atul and Blpul f
l rate o re um
f 16 ooo The normaof-.,./; fr ""J596 on the money investe d. Calcul ate the va Iue o goodwill. .• -·"'It
31st March,
2020 1,00,000 (Including abnormal toss on l ,00,000)
' ·
of profits In excess ,,,.,..~ .,. · . [Ans.: Goo~wl /1-f .34.~ .J 31st March, 2021 2,60,000 (Including abnormal gain \profit) of'( 40,000)
, . · · 2,40,000
5\. 31 st March, 2022
: 7i 1 ital of the finn of Sakshl Mehak and Meg
ha is f 1,00,000 and the market rate of interest is 1 ~O,OO,O OO and Outside Uabllities of'( S,00,000 115 on that dilte. Normal Rate
17 ota cap fi fo th last ye~rs were f 30 ooo· f 36,000 and f 42,000. Goodw ill is to be val11ec1 The firm has t~t~l asset~ of'(
• 3 (Delhi 201 at of Return in s1m1lar busmess 1s 10%.
te the goodwill of the firm.
The nrs'et prohts r, thee last 3 years' super profit· Calcula 1Q
lJ.ns.: Value of Goodwill-'( 1,44,000.1
2 yea pure ase o [Ans.: Good will~ 42,~J Calculate value of goodwill.
. . . , . . .
8,00,000 during the last few ~ea~s: :tie norma
l rate of Profit
18. A business eamed an average profit off capitalisatio n Meth od
ss is 1096. The total value of assets and hab1ht
res of the business We!e ill of the firm by applying Capitalisation Method: .
in the similar type of busine the follow ing information, ·calculate value of goodw .
value of goodwill of the firm by super profit methOd From . ·
f 22,oo,ooo and f 5,60,000 respectively. Calculate the (Delhi 2014 Q
~
• Total Capital of the firm'( 16,00,000.
·
if it is valued at 2½ years' purchase of super profit.
t-f 1,64,000; Normal rate of return 10%. l~ns.: Goodwill-~ 4,00,000.1
{Ans.: Net Assets= t' f 5,60,000 =f 76,40,000;
i2,oo,ooo- Norma l Profi
Super Profi t-t 6,36,000; Good wi/1-t ' 15,90,000.J Profit for the year " 2,00,000.
last~ ye~~ Toe normal rate of return of the industry
In the • A firm earned average profit of" 3,00,000 during the
is t' 36,000 per year. Average capita l emplo yed 27 ,ts liabilities were~ 2,00,000.
11. Average net profit expecte,1'in future by XYZ firm d in this class of busines s S%. The assets of the business were " 17,00,0 and 00
flt tCBSE 2019\
of return from capita l invest e_ 1S 1 . . .
business by the firm Is t' 2,00,000. The normal rate on firm by capitalisation of average pro .
ted to be t' 6,000 p.a. Calcul ate the value of goodw ill Calculate the goodwill of the l~ns.: Goodwill-~ 5,00,000:\
is 1096. Remuneration of the partners is estima
[Ans.: Good ~i/1-t ' 20,000.J
the basis of two years' purchase of super profit.
s:
.fi
f"
00 000 and" 2 00 000 respectively. The normal rate
•~; ,so 000 calculate goodwill of the
last three years ended 31st March, as follow 28 A and 8 were partne rs in a firm with capitals o 3, '
A partnership firm earned net profits during the averag e pro ts was , . lCBSE 2020 C)
• of return was 20% and the capitalised value of
2020- t' 17,000; 2021 -f 2_0,000; 2022 -t' 23,000. d. lP.ns.! Goodwill-~ 2,so,000.1
above -mentioned period has been f 80,00
0. Having firm by capita lisatio n of averag e profits metho
~apital investment in the firm throug hout the of goodwiH
on the capita l. Calcu late value
~rd to the risk involved. 1596 is considered to be a fair
return Profit - Capita\ Employed.)
f
1 the basis d two ~ purchase of a ~ super
profit earned during the above -ment ioned three )'ear5. [Hint: Goodwill = Capitalised Value o Average
[Ans.: Good will-'f 76,000.]
 ~ JOI aedlt t,alan«S In their filled Capt
µZ
o,,,,11#""'1.,,_ IJllfllll!SS ,..,,."9
1
Accountsofl!'l0,OOOand, 20
.,. ,,. , - t a ~ In tt,e1rcurren ming profits and their •~~
0:: '-
"'«i.,._ efS h■s
earned average prof\t Of , Clla11te 3 •Goodwll: ~ andV.luatlon '3.'3'3
8.00,CIQC) d,,..___
,. i,i,s•~,, ,irnll■r business Is lO'II,, Find value Of ~ " ' I I the last tw, yars and the ncrmal rate of
- ,,,,,_ ~ , . . . . ~. T1leY are ,egula: ~nd the value of goodw,u b y ~ ~ ,. ,-ti>"' itaUsatlon of S~per Prol\t Method: and by:
rz.sa.DflO ""',.... ~ ,.111 of ,eCU"1 IS I [Ans.: GootJ,,.,, Plt11~
1 ~) c,P profit Method If the goodwtll ls val11ec1
// :;:;,, ~,DQ.OOo- II,,_ of a firm by c:apltallsatlon of A.~ : ~ •.so 5.,per at3~R' ... --._ _
~
9 ~I) he business were, 80.00,000 and Its r - - - o f sup. PIOftt.
A ~ ,ralrt t,MfhOd. alclJaft! ..iueal~rch
are: i, of t exteTnal "-bllitles, 14.«>.000.
- ~ ~ , _ , - r s e n d l n g l l S f 20l~l!' 6 7,000and 2018-, S9,00Q ~· . '
- "°"' ---a11aSt~~--·---;,,.,..20:zo-"39,000;
to ,.....,_ 2011-f-42.- . wing Information, calculate val
!Ans.:
Goodwtll--(J)' 14AO.OOO: (II), -4,32.000,1
h•foII O
I ~
(II)
2()22-f
, , : .111 2096-
a/the n,m f 2,00,000. ri the last few
[Ans.: GOOcJ'llv///
years and the norrnar ~ s,~
,,.
ffO"'
(II
t
/4t thr
ee
ee years' purchase of Super Pro1it
lleof90odwlllof..._
years' purchase of Average Profit. ""' fwnr.
(IIO /Wf.-0 ..-o(f-4,00,000du ng . ratea, __ -.q /4tthr
,iassrMdaveratJl!f"v"• --,.,f,,nlf by: ""•' (Ill h basis of Capitallsatlon of Super Profit
,,. A t,usJness Is 1096. Rnd value of-··· -.._ orit e
/rt slfflllar t,usJness of Sup« Profit Method. a
nd .,...rs• purchase of super profits. (JIii or,t he t,asls of Capltallsatlon of Average Profit.

~-
to QpltallSatlOII goodWIII 1s valued at ,--3 pv)
i ,
/
(II) Sup«ProlitMefhodlfthe
..... buSlneSS were f «>.00,000
Asse1S ot .. ~
and Its extemal llabilltles f 7,20,000.
'""s.: '' · I t f b
..
,.._ . 'i) Goodwill-f 7,20,000; (ti) Goodwif/-~ ~,J
(Oei,,i
-, , ,~ q
/tlfol'"
at/on:
,-vera
ge Capital Employed Is, 6,00,000.
' etum In a srml ar ype o uslness I 2 o.(b.:
H0 rmal Rate of R s 1n.. .:"-I (al Profit/{Loss) of the 1irm for the last three years_,.....,
11 ms profit of f 5,00,000. d total outsiders' llabilities as on the date of -,.,, \ -~~
;/ :0,~
J2. ~ 1
1
assets ( e x d u d ~ ~~:late value of goodwlll according to Capltallsau::;-~~
9 (
.
31st March, 2022-, 2,00,000, 31st March, 2021~ 1.80,000, and 31st March, 202~ 1.60,000.
al Rate of Return In similar business Is 10%.
r 55,00,000 and f J-4,DO.OOO . tlon ~f Average Profit Method. -"1111 (cl ,-iorm
1 Profit Method as well as Capltaltsa {Ans.: Value of Goodwill-?: 9,00,00o In bott, muneration of, 1,00,000 to partners Is to be taken as charge against...-.
(d) Re
~
.,.-,..
/
JJ. on 1st Aprl' 2018, a firm
f 10,000 and the balance con
had;::; ff 1 00 000 excluding stock of 'f 20,000. The current llabllitl
Pa;ne~' Capital Accounts. If the normal rate of return Is ~~
f 60 000 at four years' purchase of super profit, find the actual 'the
A5sets of the firm (excluding goodwill, fictitious assets and non-trade Investments) 15l7 ~IXYJ whereas
(e) partners' Capital Is' 6,00,000 and Outside Uabllltles, 1,OO,OOO.

I Goodwill of the firm Is valued of ' (CBSE Sample Pa p~

[Ans.: Goodwlll-(1) ' 2,40,000; (ii) , 60,000; (ill) l 2,00,000; fiv) l 2,00,000.1

.. - - • , iaooo:Normal Profit-f 8,800; Average Actual Profit-t ,, 20,..,

;/4 of the firm.
{Ans.: Cophal &nplo,,.w- ' , , ,
.,._,.,,.•.,I'" - 4 (Average Actual Profit - Normal Profit).]
'Per,
.c.i~
evALUA
TION QUESTIONS: QUESTIONS WITH MISSING VALUES
I (Hint: f 60,000 (uuuun, '' - .

Capitalisation of Super Profit

.... dwill of the firm is valued at ~ 5,00,000 at 2 years purchase of average profit.
I 34. Average profit of a tirm dunng. the last few years is f 1,50,000. In similar
. business,
. . the. normal rate Of
1. Go<> · · al
Determine the rmssmg v ues: . .

return Is 1096 of the capital ernplo·-'

method if super profits of the firm are f 50,000.
1
1=• Calculate the value of goodwill by caprta rsatron of super pr..c.
'"'If

(CBSE 202 Q
Total Normal Profit = ~ 2,50,000 +" 1 + ~ 3,00,000 - " 1,00,000 +" 3,50,000 =" '?
0
. [Ans.: Value of Goodwi/1-f 5,00,00o.J Total Normal Profit "
Average Profit = N b
3;. Raja Brothers earn an average profit of f 30,000 with a capital of f 2,00,000. The normal rate of return
f
um ero Years
... - "
5 - ...
in the business is 1096. Using capitalisation of super profit method, workout the value of the goodWIIJ
of the firm. (NQRT) Goodwill = ~ ? x 2 =~ 5,00,000.
[Ans.: Value of Goodwi/1-f 1,00,000,J
Solution:
36. Rajan and Rajan/ are partners in a firm. Their capitals were Rajan f 3,00,000; Raja'ni f 2,00,000. During
the year ended 31st March, 2022, the firm earned a profit off l,50,000. Calculate the value of goodwill Total Normal Pr~fit_= ~ 2,50,000 + ~ 4;50,000 + ~ 3,00,000 - "1,00,000 +" 3,SO,OOO
of the firm by capitalisation of super profit assuming that the normal rate of return is 20%.
= ~ 12;50,000 (Step 3)
(NCERT, Modified/
[Ans.: Value of Goodwi/1-f 2,50,000.J
Average ro
. p fit_
-
~ 12,SO,OOO - ~, 21:0
rJ '
000 (Step 2)
37. ~verage profit of GS & Co. is f 50,000 per year. Aver~ge capital employed in the business is f 3,00,000. 5
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 Goodwill=~ 2,50,000 x 2 = ~ 5,00,000 (Step 1).
(i1J Capitalisation of Super Profit Method. [Ans.: G~dwi/1-(i) f , ,. (ii) f 2,00,000.J Note:Total Normai Profit= Average Profit x 5 =~ 12•50 •000 · r
60 000
 3.34 Double Enny Book Keeping- cBSE XII •
f 1,35,000 at 3 year5, purchase of super p '°ll
Th oodwill of a firm 1S • valued at ·
2. e g · e the miss
. i'ng values:
Detemun f 3,60,000 = f 1,20,000
Average Profit == 3

X 15 := f 7
I Normal Profit == f 7 100
Super Profit== Average Profit - Normal Pro
fit
.
== f 1,20,000 - f 7 = f 7 ' Purchase.
Goodwill = ?Uper Profi t x No . of Years-· ,

Solution: · f 3~60,000 =f 1,20,000

itf'eC
"-'
Average Profit = 3 ean
oeter
·
~. Em Joyed) x 15/100 ·
f 75,000 (Norma) Profit) f ? (Capital p - f 5 00,000 (Step 3) 0 -
0 Accoi
Capital Employed = t 75,000 x 100/lS - ' ch
r Goodwill = Super Profit x No._of Years' Pur ase
O ACCO
-~ava
f 1,35,000 = Super Profit x 3

. --
Super Profit t 1,3s,ooo·~
_. t .45,ooo. (Step 2)
I 3 "Partner
Normal Profit = Average Profit - Super Profit on by al
;I = f 1,20,000 - f 45,000 = ~ 75,000 (Step 1 ). partner:
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comes
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(iii) r
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