 # TS Grewal Solutions Class 12 Accountancy Vol 1 Chapter 3- Goodwill- Nature and Valuation

TS Grewal Solutions for Class 12 Accountancy Chapter 3- Goodwill- Nature and Valuation is contemplated to be a vital concept to be learned 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

Class 12 TS Grewal Solutions Accountancy Vol 1 Chapter 3

Question 1

Goodwill is to be valued at three years’ purchase of four years’ average profit. Profits for the last four years ending on 31st March of the firm were: 2016 − ₹ 12,000; 2017 − ₹ 18,000; 2018 − ₹ 16,000; 2019 − ₹ 14,000. Calculate the amount of Goodwill.

Solution:

Goodwill = Average Profit x Total years’ purchase

Average Profit=$\frac{Total\, Profits\, for\, past\, given\, years}{Number\, of\, Years}$

= $\frac{12,000+18,000+16,000+14,000}{4}$ = $\frac{60,000}{4}$ = ₹15,000

Numbers of Year’s Purchased = 3

So, Goodwill = 15,000 X 3 = ₹45,000

Question 2

The profit for the five years ending on 31st March, are as follows:

Year 2014–₹ 4,00,000 Year 2015–₹ 3,98,000; Year 2016–₹ 4,50,000; Year 2017–₹ 4,45,000; Year 2018–₹ 5,00,000.

Calculate goodwill of the firm on the basis of 4 years’ purchase of 5 years’ average profit.

Solution:

Goodwill = Average Profit x Total years’ purchase

Average Profit = $\frac{Total\, profits\, for\, past\, given\, years}{Number\, of\, years}$

= $\frac{4,00,000+3,98,000+4,50,000+4,45,000+5,00,000}{5}$ = $\frac{21,93,00}{5}$ = ₹ 4,38,600

Total Year’s Purchase = 3

So, Goodwill = 4,38,600 X 4 = ₹ 17,54,400

Question 3

Calculate value of goodwill on the basis of three years’ purchase of average profit of the preceding five years which were as follows:

 Year 2017–18 2016–17 2015–16 2014–15 2013–14 Profits (₹) 8,00,000 15,00,000 18,00,000 4,00,000 (Loss) 13,00,000

Solution:

Goodwill = Average Profit x Total years’ purchase

Average Profit=$\frac{Total\, Profits\, for\, past\, given\, years}{Number\, of\, Years}$

= $\frac{8,00,000+15,00,000+18,00,000-4,45,000+513,00,000}{5}$ = $\frac{51,00,000}{5}$ = ₹ 10,00,000

Numbers of Year’s Purchased = 3

So, Goodwill = 10,00,000 X 3 = ₹ 30,00,000

Question 4

Calculate the value of firm’s goodwill on the basis of one and half years’ purchase of the average profit of the last three years. The profit for first year was ₹ 1,00,000, profit for the second year was twice the profit of the first year and for the third year profit was one and half times of the profit of the second year.

Solution:

Goodwill = Average Profit × No. of years’ purchase

= 2,00,000 × 1.5 = ₹ 3,00,000

Working Notes 1: Evaluation of last three years profit

 Year Profit 1st Year 1,00,000 2nd Year 2,00,000 (1,00,000 X 2) 3rd Year 3,00,000 (2,00,000X 1.5) Total Profit 6,00,000

Working Notes 1: Average Profit Evaluation

Average Profit=$\frac{Total\, Profits\, for\, past\, given\, years}{Number\, of\, Years}$

= $\frac{6,00,000}{3}$ =Rs 2,00,000

Question 5

Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2:1. They decided to take Parv into a partnership for 1/4th share on 1st April, 2019. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher. They agreed on profits for goodwill purpose of the past five years are:

 Year 2014-15 2015-16 2016-17 2017-18 2018-19 Profita ₹ 14,000 15,500 10,000 16,000 15,000

Solution:

Evaluation of Goodwill:

Goodwill = Average Profit × No. of years’ purchase

= 14,125 x 4 = ₹56,500

Working Notes 1: Five Years’ Average Profit Evaluation

 Year Profit 2014-15 14,000 2015-16 15,500 2016-17 10,000 2017-18 16,000 2018-19 15,000 Total Profit 70,500

Five Years’ Average Profit = $\frac{70,500}{15}$ = ₹14,100

Working Notes 2: Four Years’ Average Profit Evaluation

 Year Profit 2015-16 15,500 2016-17 10,000 2017-18 16,000 2018-19 15,000 Total Profit 56,500

Four Years’ Average Profit Evaluation = $\frac{56,500}{4}$ = ₹ 14,125

So, Four Years’ Average Profits > Five Years’ Average Profits

Accordingly, for Goodwill Valuation, Average profits = ₹ 14,125

Question 6

Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2019 for 1/5th share in the future profits. For this purpose, goodwill is to be valued at 100% of the average annual profits of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were:

 Year Ended Profit (₹) 31st March, 2019 2,88,000 31st March, 2018 1,81,800 31st March, 2017 1,87,200 31st March, 2016 2,53,200

Calculate the value of goodwill.​

Solution:

Three Years’ Average Profits = $\frac{2,88,000+1,81,8000+1,87,200}{3}$

= $\frac{6,57,000}{3}$ = ₹2,19,000

Four Years’ Average Profits = $\frac{2,88,000+1,81,800+1,87,200+2,53,200}{4}$ = ₹2,19,000

= $\frac{9,10,200}{4}$ = ₹2,27,550

Since, the Four Years’ Average Profits > Three Years’ Average Profits. The goodwill will be 100% average profits of previous four years = ₹ 2,27,550

Question 7

Divya purchased Jyoti’s business with effect from 1st April, 2019. Profits shown by Jyoti’s business for the last three ​financial years were:

 2016-17 : ₹ 1,00,000 (including an abnormal gain of ₹ 12,500). 2017-18 : ₹ 1,25,000 (after charging an abnormal loss of ₹ 25,000). 2018-19 : ₹ 1,12,500 (excluding ₹ 12,500 as insurance premium on the firm’s property- now to be insured).

Calculate the value of a firm’s goodwill on the basis of two year’s purchase of the average profit of the last three years.

Solution:

Year 2016-17 normal profit = (Total Profit (1,00,000) – (12,500) Abnormal Gain)= ₹ 87,500

Year 2017-18 normal profit = (Total Profit (1,25,000) – (25,000) Abnormal Gain)= ₹ 1,50,000

Year 2018-19 normal profit = (Total Profit (1,12,500) – (12,500) Unrecorded Expenses)= ₹ 1,00,000

Average Profits= $\frac{2016-17\, normal\, profit\, +\, 2017-18\, normal\, profit\, +\, 2018-19\, normal\, profit}{3}$

Average Profits= $\frac{87,500+1,50,000+1,00,000}{3}$ = ₹ 1,12,500

Average Profits=87,500+1,50,000+1,00,0003= ₹ 1,12,500

Goodwill=Average Profits of last three years × No. of years of Purchase

= 1,12,500 × 2 = ₹ 2,25,000

Question 8

Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years’ purchase of the average profit of the last five years. These profits for the year ended 31st March, were:

 Year 2015 2016 2017 2018 2019 Profit/(Loss) (₹) 1,50,000 3,50,000 5,00,000 7,10,000 (5,90,000)

On 1st April, 2018, a car costing ₹ 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. The interest of ₹ 10,000 on Non-trade Investments is a credit to income for the year ended 31st March, 2018 and 2019.

Calculate the value of goodwill after adjusting the above.

Solution:

Goodwill = Average Profit × No. of years’ Purchased

Normal Profit Evaluation

 Years 2015 2016 2017 2018 2019 Profit /(Loss) 1,50,000 3,50,000 5,00,000 7,10,000 (5,90,000) Adjustments: Travelling Expenses Depreciation Interest – – – – – – – – – – – (10,000) 1,00,000 (25,000) (10,000) Normal Profit 1,50,000 3,50,000 5,00,000 7,00,000 (5,25,000)

Normal Average Profit = $\frac{Last\, Five\, Years’\, Normal\, Profit}{3}$

= $\frac{ 11,75,000}{5}$ = ₹ 2,35,000

Goodwill= Average Profits for last 5 years x No. of years of purchase

Therefore, Goodwill = 2,35,000 X 4 = ₹.9,40,000

Question 9

Bharat and Bhushan are partners sharing profits in the ratio of 3 : 2. They decided to admit Manu as a partner from 1st April, 2019 on the following terms:

(i) Manu will be given 2/5th share of the profit.

(ii) Goodwill of the firm will be valued at two years’ purchase of three years’ normal average profit of the firm.

Profits of the previous three years ended 31st March, were:

2019 – Profit ₹ 30,000 (after debiting loss of stock by fire ₹ 40,000).

2018 – Loss ₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).

2017 – Profit ₹ 1,10,000 (including a gain (profit) of ₹ 30,000 on the sale of fixed assets).

​Calculate the value of goodwill.

Solution:

Normal Profit Evaluation

 Year Actual Profit + Abnormal Loss Non-Recurring – Abnormal Gain Non-Recurring = Normal Profit 2019 30,000 + 40,000 – Nil = 70,000 2018 (80,000) + 1,10,00 – Nil = 30,000 2017 1,10,000 + Nil – 30,000 = 80,000 Three Years’ Normal Profit = 1,80,000

Normal Average Profit = $\frac{Last\, Three\, Years’\, Normal\, Profit}{3}$

Normal Average Profit = $\frac{ 1,80,000}{3}$ = ₹ 60,000

No. of years’ purchase = 2

Goodwill = Normal Average Profit × No. of years’ purchase

Goodwill = 60,000 X 2 = ₹ 1,20,000

Question 10

Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3 : 2. They admit Kanika into a partnership for 1/4th share in profit. Kanika brings in her share of goodwill in cash. Goodwill for this purpose is to be calculated at two years’ purchase of the average normal profit of the past three years. Profits of the last three years ended 31st March, were:

2017 – Profit ₹ 50,000 (including profit on the sale of assets ₹ 5,000).

2018 – Loss ₹ 20,000 (including loss by fire ₹ 30,000).

2019 – Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).

​Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.

Solution:

Normal Profit Evaluation

 Year Actual Profit + Abnormal Loss Non-Recurring – Abnormal Gain Non-Recurring = Normal Profit 2017 50,000 + Nil – 5,000 = 45,000 2018 (20,000) + 30,000 – Nil = 10,000 2019 70,000 + Nil – 18,000 + 8,000 = 44,000 Normal Profits for last 3 years 99,000

Normal Average Profit = $\frac{Three\, Years’\, Normal\, Profit}{3}$

Normal Average Profit = $\frac{ 99,000}{3}$ = ₹ 33,000

No. of years’ purchase = 2

Goodwill = Normal Average Profit × No. of years’ purchase

Goodwill = 33,000 X 2 = ₹ 66,000

Goodwill share of Z = Firm Goodwill X Z’s Profit Share

= 66,000 X $\frac{1}{4}$ = ₹ 16,500

Question 11

Sumit purchased Amit’s business on 1st April, 2019. Goodwill was decided to be valued at two years’ purchase of the average normal profit of the last four years. The profits for the past four years were:

 Year Ended 31st March, 2016 31st March, 2017 31st March, 2018 31st March, 2019 Profits (₹) 80,000 1,45,000 1,60,000 2,00,000

Books of Account revealed that:

(i) Abnormal loss of ₹ 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2016.

(ii) A fixed asset was sold in the year ended 31st March, 2017 and gain (profit) of ₹ 25,000 was credited to Profit and Loss Account.

(iii) In the year ended 31st March, 2018 assets of the firm were not insured due to oversight. Insurance premium not paid was ₹ 15,000.

Calculate the value of goodwill.

Solution:

Normal Profits Evaluation

 Year Profit/(Loss) ₹ Adjustment Normal Profit ₹ March 31st, 2016 80,000 20,000 1,00,000 March 31st, 2017 1,45,000 (25,000) 1,20,000 March 31st, 2018 1,60,000 (15,000) 1,45,000 March 31st, 2019 2,00,000 – 2,00,000 5,65,000

Average Profit=$\frac{Total\, Profits\, for\, past\, given\, years}{Number\, of\, Years}$

= $\frac{5,65,000}{4}$ = ₹ 1,41,250

Goodwill = Average Profit × No. of years’ purchase

=1,41,250 × 2= ₹ 2,82,500

Question 12

Geet and Meet are partners in a firm. They admit Jeet into a partnership for an equal share. It was agreed that goodwill will be valued at three years’ purchase of the average profit of the last five years. Profits for the last five years were:​

 Year Ended 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018 31st March, 2019 Profits (₹) 90,000 (Loss) 1,60,000 1,50,000 65,000 1,77,000

Books of Account of the firm revealed that:

(i) The firm had a gain (profit) of ₹ 50,000 from the sale of machinery sold in the year ended 31st March, 2016. The gain (profit) was credited in Profit and Loss Account.

(ii) There was an abnormal loss of ​₹ 20,000 incurred in the year ended 31st March, 2017 because of a machine becoming obsolete in an accident.

(iii) Overhauling the cost of second-hand machinery purchased on 1st July, 2017 amounting to ₹ 1,00,000 was debited to the Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.

Calculate the value of goodwill.

Solution:

 Particulars Year 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018 31st March, 2019 Profit/Loss (90,000) 1,60,000 1,50,000 65,000 1,77,000 Less: Gain on Sale of Machinery 50,000 Add: Abnormal Loss 20,000 Add: Existing machinery Overhaul Debited to Repairs A/c 1,00,000 Less: @20% p.a. Depreciation 15,000 17,000 Normal Profit/Loss (90,000) 1,10,000 1,70,000 1,50,000 1,60,000

Average Profits = $\left ( \frac{Normal\, profits\, from\, the\, year\, ended\, 31st\, March,2015\, to\, 31st\, March,2019}{5} \right )$

=$\left ( \frac{-90,000\, +\, 1,00,000\, +\, 1,70,000\, +\, 1,50,000\, +\, 1,60,000}{5} \right )$ = ₹ 1,00,000

Goodwill = Average profits of the last 5 years x No. of years’ of Purchase

= ₹ 1,00,000 X 3 = ₹ 3,00,000

Question 13

Profits of a firm for the year ended 31st March for the last five years were:

 Year Ended 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018 31st March, 2019 Profits ₹ 20,000 24,000 30,000 25,000 18,000

Calculate the value of goodwill on the basis of three years’ purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2015, 2016, 2017, 2018 and 2019.

Solution:

 Year Profit × Weight = Product 2015 20,000 × 1 = 20,000 2016 24,000 × 2 = 48,000 2017 30,000 × 3 = 90,000 2018 25,000 × 4 = 1,00,000 2019 18,000 × 5 = 90,000 Total 15 3,48,000

Weighted Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{3,48,000}{15}$ = ₹ 23,200

Goodwill = Weighted Average Profit x No. of years’ of Purchase

= 23,200 X 3 = ₹ 69,600

Question 14

A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2019, C is admitted to the partnership for 1/4th share of profits. For this purpose, goodwill is to be valued at two years’ purchase of the last three years’ profits (after allowing partners’ remuneration). Profits to be weighted 1 : 2 : 3, the greatest weight being given to last year. Net profit before partners’ remuneration were: 2016-17 : ₹ 2,00,000; 2017-18 : ₹ 2,30,000; 2018-19 : ₹ 2,50,000. The remuneration of the partners is estimated to be ₹ 90,000 p.a. Calculate the amount of goodwill.

Solution:

 Year Profit before Partners’ Remuneration – Partners’ Remuneration = Profit after Partners’ Remuneration 2016-17 2,00,000 – 90,000 = 1,10,000 2017-18 2,30,000 – 90,000 = 1,40,000 2018-19 2,50,000 – 90,000 = 1,60,000
 Year Profit × Weight = Product 2016-17 1,10,000 × 1 = 1,10,000 2017-18 1,40,000 × 2 = 2,80,000 2018-19 1,60,000 × 3 = 4,80,000 Total 6 8,70,000

Weighted Average Profit = Weighted Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{8,70,000}{6}$ = ₹ 1,45,000

Goodwill = Weighted Average Profit x No. of years’ of Purchase

= 1,45,000 X 2 = ₹ 2,90,000

Question 15

Raman and Daman are partners sharing profits in the ratio of 60 : 40 and for the last four years, they have been getting annual salaries of ₹ 50,000 and ₹ 40,000 respectively. The annual accounts have shown the following net profit before charging partners’ salaries:

Year ended 31st March, 2017 − ₹ 1,40,000; 2018 − ₹ 1,01,000 and ​2019 − ₹ 1,30,000.

​On 1st April, 2019, Zeenu is admitted to the partnership for 1/4th share in profit (without any salary). Goodwill is to be valued at four years’ purchase of weighted average profit of last three years (after partners’ salaries); Profits to be weighted as 1 : 2 : 3, the greatest weight being given to the last year. Calculate the value of Goodwill.

Solution:

 Year Profits before charging Salary ₹ Profits after charging Salary ₹ Weights Weighted Profits ₹ March 31st, 2017 1,40,000 1,40,000- 90,000= 50,000 1 50,000 March 31st, 2018 1,01,000 1,01,000- 90,000= 11,000 2 22,000 March 31st, 2019 1,30,000 1,30,000- 90,000= 40,000 3 1,20,000 Total 6 1,92,000

Weighted Average Profit = Weighted Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{1,92,000}{6}$ = ₹ 32,000

Goodwill = Weighted Average Profit x No. of years’ of Purchase

= 32,000 X 4 = ₹ 1,28,000

Question 16

Calculate the goodwill of a firm on the basis of three years’ purchase of the Weighted Average Profit of the last four years. The profits of the last four financial years ended 31st March, were: 2016 − ₹ 25,000; 2017 − ₹ 27,000; 2018 − ₹ 46,900 and 2019 − ₹ 53,810. The weights assigned to each year are 2016 − 1; 2017 − 2; 2018 − 3; 2019 − 4. You are supplied the following information:

(i) On 1st April, 2016, a major plant repair was undertaken for ₹ 10,000 which was charged to revenue. The said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% on Reducing Balance Method.

(ii) The Closing Stock for the years ended 31st March, 2017 and 2018 were overvalued by ₹ 1,000 and ₹ 2,000 respectively.

(iii) To cover management costs an annual charge of ​₹ 5,000 should be made for the purpose of goodwill valuation.

Solution:

 Particulars Year March 31st, 2016 March 31st, 2017 March 31st, 2018 March 31st, 2019 Profit 25,000 27,000 46,900 53,810 Add: Plant repair 10,000 Less: Depreciation @10% W.D.V 1,000 900 810 Less: Closing Stock Overvaluation 1,000 2,000 Add: Opening Stock Overvaluation 1,000 2,000 Less: Annual Charge 5,000 5,000 5,000 5,000 Normal Profit/Loss 20,000 30,000 40,000 50,000

 Year Normal Profits ₹ Weights Weighted Profits ₹ 31st March, 2016 20,000 1 20,000 31st March, 2017 30,000 2 60,000 31st March, 2018 40,000 3 1,20,000 31st March, 2019 50,000 4 2,00,000 Total 10 4,00,000

Weighted Average Profit = Weighted Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{4,00,000}{10}$ = ₹ 40,000

Goodwill = Weighted Average Profit x No. of years’ of Purchase

= 40,000 X 3 = ₹ 1,20,000

Question 17

Dinesh and Mahesh are partners sharing profits and losses in the ratio of 3 : 2. They admit Ramesh into partnership for 1/4th share in profits. Ramesh brings in his share of goodwill in cash. Goodwill for this purpose shall be calculated at two years’ purchase of the weighted average normal profit of past three years. Weights being assigned to each year 2017−1; 2018−2 and 2019−3. Profits of the last three years were:

2017 − Profit ₹ 50,000 (including profits on sale of assets ₹ 5,000).

2018 − Loss ₹ 20,000 (including loss by fire ₹ 35,000).

2019 − Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and dividend received ₹ 8,000).

​Calculate the value of goodwill. Also, calculate the goodwill brought in by Ramesh.

Solution:

2017 Normal Profits = (Total Profits (50,000) − (5,000) Profit on Sale of Assets) = ₹ 45,000

2018 Normal Profits = (Loss by Fire (35,000) − (20,000) Total Loss) = ₹ 15,000

2019 Normal Profits = (Total Profit (70,000) − (18,000) Insurance Claim Received − (8,000) Dividend) = ₹ 44,000

 Year Normal Profits ₹ Weights Weighted Profits ₹ 2017 45,000 1 45,000 2018 15,000 2 30,000 2019 44,000 3 1,32,000 Total 6 2,07,000

Weighted Average Profit = Weighted Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{2,07,000}{6}$ = ₹ 34,500

Goodwill = Weighted Average Profit x No. of years’ of Purchase

= 34,500 X 2 = ₹ 69,000

Ramesh’s Share of Goodwill=₹(69,000 x $\frac{1}{4}$) = ₹ 17,250

Question 18

Manbir and Nimrat are partners and they admit Anahat into partnership. It was agreed to value goodwill at three years’ purchase on Weighted Average Profit Method taking profits of the last five years. Weights assigned to each year as 1, 2, 3, 4 and 5 respectively to profits for the year ended 31st March, 2015 to 2019. The profits for these years were: ₹ 70,000, ₹ 1,40,000, ₹ 1,00,000, ₹ 1,60,000 and ₹ 1,65,000 respectively.

Scrutiny of books of account revealed following information:

(i) There was an abnormal loss of ₹ 20,000 in the year ended 31st March, 2015.

(ii) There was an abnormal gain (profit) of ₹ 30,000 in the year ended 31st March, 2016.

(iii) Closing Stock as on 31st March, 2018 was overvalued by ₹ 10,000.

Calculate the value of goodwill.

Solution:

Goodwill =Weighted Average Profit × No. of years’ Purchase

=1,39,000 × 3 = ₹ 4,17,000

Working Notes 1: Normal Profit Evaluation

 Year Profit/(Loss) ₹ Adjustment Normal Profit ₹ March 31st, 2015 70,000 20,000 90,000 March 31st, 2016 1,40,000 (30,000) 1,10,000 March 31st, 2017 1,00,000 – 1,00,000 March 31st, 2018 1,60,000 (10,000) 1,50,000 March 31st, 2019 1,65,000 10,000 1,75,000

Working Notes 1: Weighted Average Profits Evaluation

 Year Normal Profit Weight Product March 31st, 2015 90,000 1 90,000 March 31st, 2016 1,10,000 2 2,20,000 March 31st, 2017 1,00,000 3 3,00,000 March 31st, 2018 1,50,000 4 6,00,000 March 31st, 2019 1,75,000 5 8,75,000 Total 15 20,85,000

Weighted Average Profit = Weighted Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{20,85,000}{15}$ = ₹ 1,39,000

Question 19

Mahesh and Suresh are partners and they admit Naresh into partnership. They agreed to value goodwill at three years’ purchase on Weighted Average Profit Method taking profits for the last five years. They assigned weights from 1 to 5 beginning from the earliest year and onwards. The profits for the last five years were as follows:

 Year Ended 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018 31st March, 2019 Profits (₹) 1,25,000 1,40,000 1,20,000 55,000 2,57,000

Scrutiny of books of account revealed the following:​

(i) A second-hand machine was purchased for ​₹ 5,00,000 on 1st July, 2017 and ₹ 1,00,000 was spent to make it operational. ₹ 1,00,000 were wrongly debited to the Repairs Account. Machinery is depreciated @ 20% p.a. on Written Down Value Method.

(ii) Closing Stock as on 31st March, 2018 was undervalued by ₹ 50,000.

(iii) Remuneration to partners was to be considered as charge against profit and remuneration of ₹ 20,000 p.a. for each partner was considered appropriate.

Calculate the value of goodwill.

Solution:

 Particulars Year 31st March 2015 ₹ 31st March 2016 ₹ 31st March 2017 ₹ 31st March 2018 ₹ 31st March 2019 ₹ Profit 1,25,000 1,40,000 1,20,000 55,000 2,57,000 Add: New machine repairs 1,00,000 Less: Depreciation 15,000 17,000 Add: Undervaluation of Closing Stock 50,000 Less: Undervaluation of Opening Stock 50,000 Less: Partners Remuneration 40,000 40,000 40,000 40,000 40,000 Normal Profit/Loss 85,000 1,00,000 80,000 1,50,000 1,50,000
 Year Normal Profits ₹ Weights Weighted Profits ₹ 31st March, 2015 85,000 1 85,000 31st March, 2016 1,00,000 2 2,00,000 31st March, 2017 80,000 3 2,40,000 31st March, 2018 1,50,000 4 6,00,000 31st March, 2019 1,50,000 5 7,50,000 Total 15 18,75,000

Weighted Average Profit = Weighted Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{18,75,000}{15}$ = ₹ 1,25,000

Goodwill=Weighted Average Profits × No. of years of purchase

= ₹ 1,25,000 x 3 = ₹ 3,75,000

Question 20

Calculate the goodwill of a firm on the basis of three years’ purchase of the weighted average profit of the last four years. The appropriate weights to be used and profits are:

 Year 2015-16 2016-17 2017-18 2018-19 Profits (₹) 1,01,000 1,24,000 1,00,000 1,40,000 Weights 1 2 3 4

On a scrutiny of the accounts, the following matters are revealed:

(i) On 1st December, 2017, a major repair was made in respect of the plant incurring ₹ 30,000 which was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on Reducing Balance Method.

(ii) The closing stock for the year 2016-17 was overvalued by ₹ 12,000.

(iii) To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.

(iv) On 1st April, 2016, a machine having a book value of ₹ 10,000 was sold for ₹ 11,000 but the proceeds were

Solution:

 Particulars 2015-16 2016-17 2017-18 2018-19 Profits 1,01,000 1,24,000 1,00,000 1,40,000 Repair Capitalised +30,000 Depreciation (1,000) (2,900) Overvaluation Closing Stock (12,000) 12,000 Management Cost (24,000) (24,000) (24,000) (24,000) Sale Proceeds (10,000) Wrong Depreciation 900 810 Adjusted Profits 77,000 78,000 1,17,900 1,13,910 Weights 1 2 3 4 Product 77,000 1,56,0000 3,53,700 4,55,640

Working Notes:

Weighted Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{77,000\, +\, 1,56,0000\, +\, 1,56,0000\, +\, 4,55,640}{10}$

= ₹ 1,04,234

Goodwill=Weighted Average Profits × No. of years of purchase

= ₹ 1,04,234 x 3 = ₹ 3,12,702

Note: Sale wrongly credited in 2015-16 is deducted after adjusting ₹ 1,000 profit.

Question 21

Average profit earned by a firm is ₹ 80,000 which includes undervaluation of stock of ₹ 8,000 on an average basis. The capital invested in the business is ​₹ 8,00,000 and the normal rate of return is 8%. Calculate goodwill of the firm on the basis of 7 times the super profit.

Solution:

Average Normal Profits =(Average Profits (80,000) + (8,000)Undervaluation of Stock)= ₹ 88,000

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Normal Profits= (8,00,000 × $\frac{8}{100}$ = ₹ 64,000

Super Profits= Average Profits (88,000)− (64,000) Normal Profits= ₹ 24,000

Goodwill= Super Profits × No. of years of Purchase

=₹24,000 x 7 = ₹ 1,68,000

Question 22

Gupta and Bose had a firm in which they had invested ₹ 50,000. On average, the profits were ₹ 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years’ purchase of profits in excess of profits @ 15% on the money invested. Calculate the value of goodwill.

Solution:

Goodwill= Super Profits × No. of years of Purchase

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Normal Profits= (50,000× $\frac{15}{100}$ = ₹ 7,500

Actual Profit = ₹ 16,000

Super Profit = Actual Profit – Normal Profit

16,000 – 7,500 = ₹ 8,500

Total years’ purchase = 4

Goodwill= 8,500 X 4 = ₹ 34,000

Question 23

The total capital of the firm of Sakshi, Mehak and Megha is ₹ 1,00,000 and the market rate of interest is 15%. The net profits for the last 3 years were ₹ 30,000; ₹ 36,000 and ₹ 42,000. Goodwill is to be valued at 2 years’ purchase of the last 3 years’ super profits. Calculate the goodwill of the firm.

Solution:

Goodwill= Super Profits × No. of years of Purchase

Super Profit = Average Profit – Normal Profit

Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

= $\frac{30,000\, +\, 36,000\, +\, 42,000}{3}$ = ₹ 36,000

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Normal Profits= (1,00,000× $\frac{15}{100}$ = ₹ 15,000

Super Profit = ₹ 36,000 – ₹ 15,000 = ₹ 21,000

Total years’ purchase = 2

Goodwill= 21,000 X 2 = ₹ 42,000

Question 24

Rakesh and Ashok earned a profit of ₹ 5,000. They employed the capital of ​₹ 25,000 in the firm. It is expected that the normal rate of return is 15% of the capital. Calculate the amount of goodwill if goodwill is valued at three years’ purchase of super profit.

Solution:

Actual Profits = ₹ 5,000

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Normal Profits= (25,000 × $\frac{15}{100}$ = ₹ 3,750

Super Profits = Actual Profits (5,000) − (3,750) Normal Profits = ₹1,250

Goodwill = Super Profits × No. of years of Purchase

No. of years of Purchase = 3

= ₹ 1,250 X 3 = ₹ 3,750

Question 25

Average net profit expected in future by XYZ firm is ₹ 36,000 per year. Average capital employed in the business by the firm is ₹ 2,00,000. The normal rate of return from capital invested in this class of business is 10%. Remuneration of the partners is estimated to be ₹ 6,000 p.a. Calculate the value of goodwill on the basis of two years’ purchase of super profit.

Solution:

Goodwill = Super Profits × No. of years of Purchase

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Normal Profits= (2,00,000 × $\frac{10}{100}$ = ₹ 20,000

Expected Profit (Actual) = 36,000 – 20,000 = ₹ 10,000

Super Profits = Actual Profits (30,000) − (20,000) Normal Profits = ₹ 10,000

No. of years of Purchase = 2

Goodwill = 10,000 x 2 = ₹ 20,000

Question 26

A partnership firm earned net profits during the last three years ended 31st March, as follows: 2017 − ₹ 17,000; 2018 − ₹ 20,000; 2019 − ₹ 23,000.

The capital investment in the firm throughout the above-mentioned period has been ₹ 80,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. Calculate value of goodwill on the basis of two years’ purchase of average super profit earned during the above-mentioned three years.

Solution:

Goodwill = Super Profits × No. of years of Purchase

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Normal Profits= (80,000 × $\frac{15}{100}$ = ₹ 12,000

Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

Average Actual Profit = $\frac{17,000\, +\, 20,000\, +\, 23,000}{3}$

= $\frac{60,000}{3}$ = ₹ 20,000

No. of years of Purchase = 2

Goodwill = 8,000 x 2 = ₹ 16,000

Question 27

A partnership firm earned net profits during the past three years as follows:

 Year ended 31st March, 2019 31st March, 2018 31st March, 2017 Net Profit (₹) 2,30,000 2,00,000 1,70,000

Capital investment in the firm throughout the above-mentioned period has been ₹ 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of the partners during this period is estimated to be ₹ 1,00,000 p.a.

Calculate value of goodwill on the basis of two years’ purchase of average super profit earned during the above-mentioned three years.

Solution:

Goodwill = Super Profits × No. of years of Purchase

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Normal Profits= (4,00,000 × $\frac{15}{100}$ = ₹ 60,000

 Year Profit before Partners’ Remuneration – Partners’ Remuneration = Actual Profit after Remuneration 2017 1,70,000 – 1,00,000 = 70,000 2018 2,00,000 – 1,00,000 = 1,00,000 2019 2,30,000 – 1,00,000 = 1,30,000

Average Profit = $\frac{Total\, Product\, Profit}{Total\, of\, Weight}$

Average Actual Profit = $\frac{70,000\, +\, 1,00,000\, +\, 1,30,000}{3}$

= $\frac{3,00,000}{3}$ = ₹ 1,00,000

Super Profits = Actual Profits (1,00,000) − (60,000) Normal Profits = ₹ 40,000

No. of years of Purchase = 2

Goodwill = 40,000 x 2 = ₹ 80,000

Question 28

Ideal Marketing earned an average profit of ₹ 4,00,000 during the last five years. Normal rate of return on capital employed is 10%. Balance Sheet of the firm as at 31st March, 2019 was as follows:

 Liabilities ₹ Assets ₹ Capital A/cs: Land and Building 10,00,000 Shyam 5,00,000 Furniture 2,00,000 Sunder 5,00,000 10,00,000 Investments 1,00,000 Current A/cs: Sundry Debtors 5,00,000 Shyam 2,00,000 Bills Receivable 50,000 Sunder 2,00,000 4,00,000 Closing Stock 3,00,000 Reserves 3,40,000 Cash in Hand 50,000 Sundry Creditors 4,00,000 Cash at Bank 1,00,000 Bills Payable 1,00,000 Outstanding Expenses 60,000 23,00,000 ​ 23,00,000

​Calculate the value of goodwill, if it is valued at three years’ purchase of Super Profits.

Solution:

Goodwill = Super Profits × No. of years of Purchase

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Capital Employed = Total Assets − Non−Trade Investments− Outside Liabilities

= 23,00,000−1,00,000−5,60,000 = ₹ 16,40,000

Normal Profits= (16,40,000 × $\frac{10}{100}$ = ₹ 1,64,000

Average Profits= ₹ 4,00,000

Super Profits=Average Profits (4,00,000) −(1,64,000)Normal Profits= ₹ 2,36,000

No. of years of Purchase = 3

Goodwill = 2,36,000 X 3 = ₹ 7,08,000

Question 29

Varuna and Karuna are partners for equal shares. They admit Lata into partnership for 1/4th share. It was agreed to value goodwill of the firm at 4 years’ purchase of super profit. Normal rate of return is 15% of the capital employed. Average profit of the firm is ₹ 4,00,000. Balance Sheet of the firm as at 31st March, 2019 was as follows:

 Liabilities ₹ Assets ₹ Capital A/cs: Furniture 4,00,000 Varuna 5,00,000 Computers 3,00,000 Karuna 5,00,000 10,00,000 Electrical Fittings 1,00,000 Long-term Loan 5,50,000 Investments (Trade) 2,00,000 Sundry Creditors 2,00,000 Stock 3,00,000 Outstanding Expenses 50,000 Sundry Debtors 3,00,000 Advances from Customers 1,50,000 Bills Receivable 50,000 Cash in Hand 50,000 Cash at Bank 2,00,000 Deferred Revenue Expenditure: Advertisement Suspense 50,000 19,50,000 19,50,000

​Calculate the value of goodwill.

Solution:

Goodwill = Super Profits × No. of years of Purchase

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Capital Employed = Total Assets − Non−Trade Investments− Outside Liabilities

= 19,50,000−50,000−4,00,000 = ₹ 15,00,000

Normal Profits= (15,00,000 × $\frac{15}{100}$ = ₹ 2,25,000

Average Profits= ₹ 4,00,000

Super Profits=Average Profits (4,00,000) −(2,25,000)Normal Profits= ₹ 1,75,000

No. of years of Purchase = 4

Goodwill = 1,75,000 X 4= ₹ 7,00,000

Question 30

A business earned an average profit of ₹ 8,00,000 during the last few years. The normal rate of profit in the similar type of business is 10%. The total value of assets and liabilities of the business were ₹ 22,00,000 and ₹ 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at $2\frac{1}{2}$% years’ purchase of super profits.

 Liabilities ₹ Assets ₹ Capital A/cs: Furniture 4,00,000 Varuna 5,00,000 Computers 3,00,000 Karuna 5,00,000 10,00,000 Electrical Fittings 1,00,000 Long-term Loan 5,50,000 Investments (Trade) 2,00,000 Sundry Creditors 2,00,000 Stock 3,00,000 Outstanding Expenses 50,000 Sundry Debtors 3,00,000 Advances from Customers 1,50,000 Bills Receivable 50,000 Cash in Hand 50,000 Cash at Bank 2,00,000 Deferred Revenue Expenditure: Advertisement Suspense 50,000 19,50,000 19,50,000

​Calculate the value of goodwill.

Solution:

Goodwill = Super Profits × No. of years of Purchase

Normal Profits= (Capital Employed × $\frac{Normal\, Rate\, of \, Income}{100}$

Capital Employed = Total Assets − Outside Liabilities

= 22,00,000 − 5,60,000 − 4,00,000 = ₹ 16,40,000

Normal Profits= (16,40,000 × $\frac{10}{100}$ = ₹ 1,64,000

Average Profits= ₹ 8,00,000

Super Profits=Average Profits (8,00,000) −(1,64,000)Normal Profits= ₹ 6,36,000

No. of years of Purchase = 2.5

Goodwill = 6,36,000 X 2.5 = ₹ 15,90,000