Goodwill
Goodwill
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."
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.
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
Year
Profit(t)
2013-14
50,000
2014-15
40,000
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
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
\
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
' \ ~• • '
=
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
~
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' ·
~~
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).
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
//
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
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?
=
_....,;,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....• .
.
' 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.
(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-· ,
. --
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:
there i~
results
I Stating
As a re
comes
·,·/ A firm
I
(i) C
(ii) a
(iii) r
(iv) c
(v) i
'Recor