TS Grewal Solutions for Class 12 Accountancy Chapter 3- Goodwill- Nature and Valuation is contemplated to be a vital concept to be learnt completely by the students. Here, we have provided TS Grewal Accountancy solutions for class 12 in a simple and a step by step manner, which is helpful for the students to score well in their upcoming board examinations.
Board | CBSE |
Class | Class 12 |
Subject | Accountancy |
Chapter | Chapter 3 |
Chapter Name | Goodwill- Nature and Valuation |
Number of questions solved | 10 |
Category | TS Grewal |
Chapter 3- Goodwill- Nature and Valuation explains the below-mentioned concepts:
- Meaning of Goodwill
- Factors affecting the value of Goodwill
- Need for valuing Goodwill
- Methods of valuing Goodwill
TS Grewal Solutions for Class 12 Accountancy Chapter 3- Goodwill- Nature and Valuation
Question 1
The gains for the 5 years on March 31st are mentioned below:
- 2014 – â‚¹. 5,00,000/-
- 2015 – â‚¹. 4,00,000/-
- 2016 – â‚¹. 6,00,000/-
- 2017 – â‚¹. 4,50,000/-
- 2018 – â‚¹. 6,00,000/-
Now, compute the goodwill of the enterprise on the basis of 4 years purchase of 5 years profit.
Solution:
\(Goodwill = Average\, Profits \, \times \, Number \, of \, years \, of \, purchase\)Now, \(Average\, Profits \,=\, \frac{Total \, Profits}{Number \, of \, years}\) \(Average \, Profits\, = \, \frac{5,00,000+4,00,000+6,00,000+4,50,000+6,00,000}{5}\)
= 5,10,000
Therefore, goodwill = 5,10,000 X 4 = â‚¹. 20,40,000/-
Question 2
Compute the value of the firmâ€™s goodwill on the basis of 18 months or a and half years purchase of the average gains of previous 3 years. The profit for the 1st year was â‚¹.1,50,000/-, profit for the 2nd year was twice the profir of the 1st year and the 3rd year profir was 1.5 times of the profit of the 2nd year.
Solution:
\(Goodwill = Average\, Profits \, \times \, Number \, of \, years \, of \, purchase\)Goodwill = 3,00,000 X 1.5 = â‚¹. 4,50,000/-
Working Notes –
Calculation of profits (Previous 3 years)
Year | Profit |
1st | 1,50,000 |
2nd | 1,50,000 X 2 = 3,00,000 |
3rd | 3,00,000 X 1.5 = 4,50,000 |
TOTAL | 9,00,000 |
Calculation of average profits
Average profits = \(\frac{Total \, Profits \, for\, the\, previous \, years\,}{Number\, of\, years}\, =\, \frac{9,00,000}{3}\)
Therefore, Average profits = 3,00,000
Question 3
P and Q are partners in an enterprise, sharing profits and losses in the ratio of 3:2. Now, they decided to admit R into the partnership for 1/4th share on 1st of April, 2018. For this Objective, Goodwill is to be valued 4 times the average annual profit of the last 4 or 5 years whichever is higher. The agreed points for goodwill purpose of the past 5 years are as follows:
Year | 2013-14 | 14-15 | 15-16 | 16-17 | 17-18 |
â‚¹ (Profits) | 15,000 | 16,500 | 11,000 | 17,000 | 16,000 |
Solution:
Computation of Goodwill:
Goodwill = Average profit X number of yearsâ€™ purchase
= 15,125 X 4 = â‚¹. 60,500/-
Working Notes –
Calculation of profit for 5 years:
Year | Profit |
2013-14 | 15,000 |
14-15 | 16,500 |
15-16 | 11,000 |
16-17 | 17,000 |
17-18 | 16,000 |
Total Profit | 75,500 |
Average profit for 5 years = 75,500/5 = 15,100
Calculation of profit for 4 years:
Year | Profit |
2014-15 | 16,500 |
15-16 | 11,000 |
16-17 | 17,000 |
17-18 | 16,000 |
Total Profit | 60,500 |
Average profit for 4 years = 60,500/4 = â‚¹. 15,125/-
Average profits (4 years) > Average profits (5 years)
Accordingly, for goodwill valuation, average profits are â‚¹. 15,125/-
Question 4
Claire and Sophie are the partners sharing profits in the ratio of 3:4. They ascertained to admit Sharon as a partner from the 1st of April, 2018 on the following terms:
- Sharon will be given a 2/5th share of the profit
- Goodwill of the enterprise is valued at 2 years purchase of 3 years normal average profit of the enterprise. Gains of the previous 3 years ended March 31st were:
- 2018 – Profit – â‚¹. 50,000/- (after debiting a loss of stock by fire â‚¹. 60,000/-)
- 2017 – Loss – â‚¹. 1,00,000/- (involves voluntary retirement compensation pain â‚¹. 1,30,000/-)
- 2016 – Profit of â‚¹. 1,30,000/- (including the gain of â‚¹. 50,000/- on the sale of fixed assets)
Now, evaluate the Goodwill.
Solution:
Goodwill = Normal average profit X Number of years of purchase
= Normal average profit = â‚¹. 73,333/-
Number of years of purchase = 2
Therefore, Goodwill = 73,333 X 2 = 1,46,666/-
Working Notes –
Year | Actual Profit | + | Abnormal loss non-recurring | – | Abnormal gain non-recurring | = | Normal Profit |
2018 | 50,000 | + | 60,000 | – | Nil | = | 1,10,000 |
2017 | (1,00,000) | + | 1,30,000 | – | Nil | = | 30,000 |
2016 | 1,30,000 | + | Nil | – | 50,000 | = | 80,000 |
Normal profits for the last 3 years | 2,20,000 |
Normal average profit = Normal profit for last 3 years / 3
= 2,20,000/3 = â‚¹. 73,333/-
Question 5
Profits of a form for the year ended March 31st, for the last 5 years were –
Year ended | 31st March 2014 | 31st March
2015 |
31st March
2016 |
31st March
2017 |
31st March
2018 |
â‚¹ (Profits) | 30,000 | 34,000 | 40,000 | 35,000 | 28,000 |
Now, compute the value of goodwill on the basis of 3 years purchase of weighted average profit after assigning weights 1,2,3,4 and 5 respectively to the profits for the years ended 31st March – 2014, 2015, 2016, 2017 and 2018.
Solution:
Goodwill = Weighted average profit X Number of years purchase
= 33,200 X 3 = â‚¹. 99,600/-
Working Notes –
Year | Profit | X | Weight | = | Product |
2014 | 30,000 | X | 1 | = | 30,000 |
2015 | 34,000 | X | 2 | = | 68,000 |
2016 | 40,000 | X | 3 | = | 1,20,000 |
2017 | 35,000 | X | 4 | = | 1,40,000 |
2018 | 28,000 | X | 5 | = | 1,40,000 |
15 | 4,98,000 |
Weighted Average Profit = Total product of profits / Total number of weights
= 4,98,000/15
= â‚¹. 33,200/-
Question 6
Compute the goodwill of an enterprise on the basis of 3 years purchase of the weighted average profit of the last 4 years. The appropriate weights to be used and the profits are:
Year | 2014-15 | 2015-16 | 2016-17 | 2017-18 |
Profit in â‚¹ | 1,11,000 | 1,34,000 | 1,10,000 | 1,50,000 |
Weight | 1 | 2 | 3 | 4 |
On the analysis of accounts, the following matters are disclosed:
- On December 1st, 2016, a major repair was made in respect with the plant incurring â‚¹. 40,000/- which was charged to the revenue.
- The closing stock for the year 2015-16 was overvalued by â‚¹. 22,000/-.
- To cover management cost, an annual charge of â‚¹. 34,000/- must be made for the purpose of goodwill valuation.
- In 2015-16, a machine possessing a book value of â‚¹. 20,000/- was sold @ â‚¹. 21,000/-, but the proceeds were incorrectly credited to the Profit and Loss account. No effect has been given to rectify the same. Depreciation is charged on the machine @ 10% per annum on reducing balance method.
Solution:
Particulars | 2014-15 | 2015-16 | 2016-17 | 2017-18 |
Profits | 1,11,000 | 1,34,000 | 1,00,000 | 1,50,000 |
Repair capitalised | +40,000 | |||
Depreciation | (1,333) | (3,866) | ||
Overvaluation of closing stock | (22,000) | 22,000 | ||
Management cost | (34,000) | (34,000) | (34,000) | (34,000) |
Sale proceeds | (20,000) | |||
Adjusted profits | 77,000 | 78,000 | 1,26,667 | 1,21,134 |
Weights | 1 | 2 | 3 | 4 |
Product | 77,000 | 1,56,000 | 3,80,001 | 4,48,536 |
Working Notes –
Goodwill = Weighted average profit X Number of years purchase
Weighted average profit = Total of product / Total of weights
= 77,000+1,56,000+3,80,001+4,48,536 / 10
= 1,06,153
Therefore, Goodwill = 1,06,153 X 3 = â‚¹. 3,18,459/-
Note 1
Depreciation on â‚¹. 40,000/- machinery is charged for only 4 months on the year 2016-17
Note 2
Sale proceeds incorrectly credited in 2015-16 have been deducted after adjusting for the profit of â‚¹. 1,333/-. No depreciation is charged, since date of sale is not given (presumed that the machinery is sold during the end of the year)
Question 7
The average net profit in the future by ABC enterprise in â‚¹. 50,000/- per annum. Average capital employed in the business by the enterprise is â‚¹. 3,00,000/-. The normal rate of return from the capital invested in this class of business is 10%. Remuneration of the partners is estimated to be @ â‚¹. 5,000/- per annum. Find out the value of goodwill on the basis of 2 years purchase of super profit.
Solution:
Goodwill = Super profit X number of years purchase
Normal profit = Expected capital employed X Normal rate of return / 100
= 3,00,000 X 10/100 = 30,000/-
Actual expected profit = 50,000 – 5,000 = 45,000/-
Super profit = Actual expected profit – Normal expected profit
Super profit = 45,000 – 30,000 = 15,000/-
Number of years of purchase = 2
Super profit = 15,000/-
Therefore, goodwill = Super profit X Number of years of purchase
Hence, goodwill = 15,000 X 2 = â‚¹. 30,000/-
Question 8
Maaya and Maanav are partners in an enterprise and they admit Jai into thr partnership with effect from 1st of April, 2018. They agreed to value goodwill at 3 years purchase of super profit method for which the determined to an average profit of the last 5 years. The profit for the last 5 years was:
Year ended | Net Profit (â‚¹) | |
31st March 2014 | 1,50,000 | |
31st March 2015 | 1,80,000 | |
31st March 2016 | 1,00,000 | Including the abnormal loss â‚¹. 1,00,000/- |
31st March 2017 | 2,60,000 | Including the abnormal gain â‚¹. 50,000/- |
31st March 2018 | 2,40,000 |
The enterprise has total assets of â‚¹.25,00,000/- and outside liabilities of â‚¹. 10,00,000/- as on that date. The normal rate of return in a similar business is 10%. Compute the value of goodwill.
Solution:
Calculation of Normal Profits (31st March)
Years | 2014 | 2015 | 2016 | 2017 | 2018 |
Profit and Loss | 1,50,000 | 1,80,000 | 1,00,000 | 2,60,000 | 2,40,000 |
Adjustments | – | – | 1,00,000 | (50,000) | – |
Normal Profit | 1,50,000 | 1,80,000 | 2,00,000 | 2,10,000 | 2,40,000 |
- Total Normal Profit:
1,50,000+1,80,000+2,00,000+2,10,000+2,40,000
= â‚¹. 9,80,000/-
- Calculation of capital employed:
Calculation of capital employed = Total assets – Outside Liabilities
Calculation of capital employed = 25,00,000 – 10,00,000
Calculation of capital employed = â‚¹. 15,00,000/-
- Calculation of Super Profits:
Average Profit = Total profit of the previous years / Number of years
Average Profit = 9,80,000/5
Average Profit = 1,96,000
Normal Profit = Capital employed X Normal rate of returns / 100
15,00,000 X 10/100 = â‚¹. 1,50,000/-
Super profit = Average profit – Normal profit
Super profit = 1,96,000 – 1,50,000 = 46,000
Goodwill = Super profit X Number of years of purchase
Therefore, Goodwill = 46,000 X 3 = â‚¹. 1,38,000/-
Question 9
From the following data, compute the value of goodwill of the enterprise by applying Capitalisation Method: Total capital of the enterprise – â‚¹. 20,00,000/-. Normal rate of return – 10%. Profit of the year – â‚¹. 3,00,000/-.
Solution:
Goodwill = Capitalised value of profit – Actual Capital
Capitalised value of profit = Profit X 100 / Net rate of return
= 3,00,000 X 100/10 = 30,00,000/-
Total Capital = â‚¹. 20,00,000/-
Therefore, Goodwill = 30,00,000 – 20,00,000
Goodwill = â‚¹. 10,00,000/-
Question 10
X and Y are partners in an enterprise. Their capitals were, X – â‚¹. 4,00,000, Y – â‚¹. 3,00,000/-. During the year 2017-18, the enterprise earned a profit of â‚¹. 2,00,000/-. Compute the value of goodwill of the enterprise by capitalisation method of super profits assuming that the normal rate of return is 20%.
Solution:
Goodwill = Super profit X 100 / Normal rate of return
Super Profits = Average profit – Normal Profit
Average Profit = 2,00,000 (given)
Normal profit = Capital employed X Normal rate of return
Normal profit = [4,00,000+3,00,000] X 20%
Normal profit = 7,00,000 X 20%
Normal profit = 1,40,000/-
Super Profit = 2,00,000 – 1,40,000 = 60,000/-
Goodwill = 60,000 X 100/20 = 3,00,000/-
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