Assignment- 2

Goodwill
Concept- Average Profit Method
1. The goodwill of a firm is valued at 4 years' purchase of average profits of five years. The profits of the last five years were:
Year Profits (₹)

2017-18 2,00,000

2018-19 (3,00,000)

2019-20 4,50,000(including an abnormal gain of Rs. 50,000)

2020-21 3,50,000 (after charging an abnormal loss of Rs. 90,000)

2021-22 2,60,000
Calculate the amount of Goodwill
2. X purchased the business of Y from 1st April, 2019. For this purpose goodwill is to be valued at 100% of the average annual profits of
the last four years. The profits shown by Y's business for the last four years were :
Year ended Profits (₹)

31st March, 2016 1,00,000 (after debiting loss of stock by fire Rs. 50,000)

31st March, 2017 (1,50,000) (includes voluntary retirement compensation paid Rs. 80,000)

31st March, 2018 1,50,000

31st March, 2019 2,00,000

Verification of books of accounts revealed the following:
a. During the year ended 31st March, 2017, a machine got destroyed in an accident and Rs. 60,000 was written off as loss in Profit
& Loss Account.
b. On 1st July 2017, Two Computers costing Rs. 40,000 each were purchased and were debited to Travelling Expenses Account
on which depreciation is to be charged @ 10% p.a. on the Straight Line Method.
Calculate the value of goodwill.
3. A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1. They decided to take D into partnership for 1/4th share
on 1st April, 2020. For this purpose, goodwill is to be valued at 3 times the average annual profits of the previous four or five years
whichever is higher. The agreed profits for goodwill purpose of the past five years are as follows:
Year ended Profits (₹)

31st March, 2016 1,30,000

31st March, 2017 1,20,000

31st March, 2018 1,50,000

31st March, 2019 1,10,000

31st March, 2020 2,00,000

Calculate the value of Goodwill.
4. A, B and C are partners sharing profits and losses equally. They agree to admit D for equal share. For this purpose goodwill is to be
valued at 3 year's purchase of average profits of last 5 years which were as follows:
Year Profits (₹)

2017-18 60,000

2018-19 1,50,000

2019-20 (20,000)

2020-21 2,00,000

2021-22 1,85,000
 On 1st October, 2018 a computer costing Rs. 40,000 was purchased and debited to office expenses account on which depreciation is to
be charged @25% p.a.
Calculate the value of goodwill.
5. The profits earned by a firm during the last four years were as follows:
Year ended Profits (₹)

31st March, 2018 80,000

31st March, 2019 1,00,000

31st March, 2020 1,10,000

31st March, 2021 1,50,000

Calculate the value of goodwill on the basis of three year's purchase of weighted average profits. Weights to be used are 1,2,3, and 4
respectively to the profits for 2018, 2019, 2020 and 2021.
6. Following information is available about the business of a firm:
(i) Profits: In 2019, Rs. 40,000; In 2020, Rs. 50,000; In 2021, Rs. 60,000
(ii) Non- recurring income of Rs.1,000 is included in the profits of 2014,
(iii) Profits of 2019 have been reduced by Rs. 6,000 because goods were destroyed by fire,
(iv) Goods have not been insured but it is thought to insure them in future. The insurance premium is estimated at Rs. 400 per year,
(v) Reasonable remuneration of the proprietor of business is Rs. 6,000 per year, but it has not been taken into account for calculation of
above mentioned profits.
(vi) Profits of 2021 include Rs. 5,000 income on investment.
Goodwill is agreed to be valued at two year's purchase of the weighted average profits of the past three years. The appropriate weights to
be used are: 2019:-1; 2020: -2; 2021: -3.
7. Calculate the value of goodwill on the basis of three year's purchase of the weighted average profits of the last five years. Profits to be
weighted 1, 2, 3, 4 and 5, the greatest weightage to be given to last year. Profits of the last five years were:
Year ended Profits (₹)

31st March, 2015 80,000 (after considering abnormal loss of Rs. 41,500)

31st March, 2016 1,05,000 (after considering abnormal gain of Rs. 40,000)

31st March, 2017 (20,000)

31st March, 2018 1,80,000

31st March, 2019 2,00,000

Books of Accounts of the firm revealed that:
a. Closing Stock as on 31 March, 2015 was overvalued by Rs. 40,000.
b. Repairs to Machinery Rs. 60,000 were wrongly debited to Machinery Account on 1st July, 2017. Depreciation was charged on
Machinery 20% p.a. on diminishing balance method.
8. Calculate 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:
a. 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.
b. The Closing Stock for the years ended 31st March, 2017 and 2018 were overvalued by ₹ 1,000 and ₹ 2,000 respectively.
c. To cover management costs an annual charge of ​₹ 5,000 should be made for the purpose of goodwill valuation.
9. 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, 31st March, 31st March, 31st March, 31st March,
2015 2016 2017 2018 2019

Profits (₹) 1,25,000 1,40,000 1,20,000 55,000 2,57,000

Scrutiny of books of account revealed the following:​
a. A second-hand machine was purchased for ​₹ 5,00,000 on 1st July, 2017 and ₹ 1,00,000 were 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.
b. Closing Stock as on 31st March, 2018 was undervalued by ₹ 50,000.
c. Remuneration to partners was to be considered as charge against profit and remuneration of ₹ 20,000 p.a. for each partner was
considered appropriate.
d. Calculate the value of goodwill.
 10. 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:
a. 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.
b. The closing stock for the year 2016-17 was overvalued by ₹ 12,000.
c. To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.
d. On 1st April, 2016, a machine having a book value of ₹ 10,000 was sold for ₹ 11,000 but the proceeds were wrongly credited to
Profit and Loss Account. No effect has been given to rectify the same. Depreciation is charged on machines @ 10% p.a. on
reducing the balance method.
Concept- Super Profit Method
11. A firm earned profits of Rs. 80,000, Rs. 1,00,000, Rs. 1,20,000 and Rs. 1.20,000 and Rs. 1,80,000 during 2010-11, 2011-12, 2012-13
and 2013-14 respectively. The firm has capital investment of Rs. 5,00,000. A fair rate of return on investment is 15% p.a. Calculate
goodwill of the firm based on three years' purchase of average super profits of last four years.
12. Capital invested in a firm is Rs. 3,00,000. Normal rate of return is 10%. Average profits of the firm are Rs. 41,000 (after an abnormal
loss of Rs. 2,000). Calculate goodwill at five times the super profits.
13. The capital of the firm of Anuj and Benu is Rs.10,00,000 and the market rate of interest is 15%. Annual salary to the partners is Rs.
60,000 each. The profit for the three years wore Rs. 2,80,000, Rs. 3,80,000 and Rs. 4,20,000, Goodwill of the firm is to be valued on the
basis of two years purchase of last three years average super profits. Calculate the goodwill of the firm.
14. Find out the capital employed from the following information:
Normal rate of return: 12%

Year Profits (₹)

2017-18 80,000

2018-19 1,30,000

2019-20 1,56,000
Goodwill valued at 3 years purchase of Super Profits is ₹ 1,50,000.
15. A and B are partners. They admit C for 1/5th share in profits. For this purpose goodwill is to be valued at three year's purchase of super
profits.Following information is provided to you:

A's Capital 5,00,000

B's Capital 4,00,000

General Reserve 1,50,000

Profit & Loss A/c (Cr.) 30,000

Sundry Assets 12,00,000

The normal rate of return is 15% p.a. Average Profits are ₹ 2,00,000 per year. You are required to calculate C's share of goodwill.
16. On 1st April, 2014, a firm had assets of Rs. 1,00,000 excluding stock of Rs. 20,000. Partners' capital Accounts showed a balance of Rs.
60,000. The current liabilities were Rs. 10,000 and the balance constituted the reserve. If the normal rate of return is 8%, the 'Goodwill
of the firm is valued at Rs. 60,000 at four year purchase of super profit, find the average profit of the firm.
17. On April 1st 2020, an existing firm had assets of Rs. 5,00,000 including cash of Rs. 20,000. The firm had a General Reserve of Rs.
90,000, partner's capital accounts showed a balance of Rs. 3,80,000 and creditors amounted to Rs. 30,000. If the normal rate of return is
20% and the goodwill of the firm is valued at Rs. 64,000 at 4 year's purchase of super profit, find the average profits of the firm.
18. 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:

Amount Amount
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.
19. 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 Amount Assets Amount

(₹) ​(₹)

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.
20. On 1st April, 2019, an existing firm had assets of ₹ 3,75,000 including cash of ₹ 50,000. Its creditors amounted to ₹ 25,000 on that date.
The firm had a Reserve of ₹ 50,000 while Partners' Capital Accounts showed a balance of ₹ 3,00,000. If Normal Rate of Return is 20%
and goodwill of the firm is valued at ₹ 1,20,000 at four years' purchase of super profit, find the average profit per year of the existing
firm.
Concept- Capitalisation Method
21. The average profit of a firm is Rs. 48,000. The total assets of the firm are Rs. 8,00,000. Value of liabilities is Rs. 5,00,000. Average rate
of return in the same business is 12%.
Calculate goodwill from capitalization of average profits method.
22. Anupma, Purnima and Ruchika are partners in a business. Balances in their Capital and Current Accounts as on 31st March, 2019 were:

Capital Account Current Account

Anupma 6,00,000 60,000 (Dr.)

Purnima 5,00,000 30,000 (Dr.)

Ruchika 5,00,000 10,000 (Cr.)

The firm earned an average profit of Rs. 2,40,000. If the normal rate of return is 12%, find the value of goodwill by Capitalization of
Average Profit Method.
23. Form the following particulars, calculate value of goodwill of a firm by applying Capitalisation of Average Profit Method:
(i) Profits of the last five consecutive years ending 31st March are: 2019 − ₹ 54,000; 2018 − ₹ 42,000; 2017 − ₹ 39,000; 2016 − ₹ 67,000
and 2015 − ₹ 59,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm ₹ 2,00,000.
24. From the following information, calculate value of goodwill of the firm:
(i) At three years' purchase of Average Profit.
(ii) At three years' purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average profit.
Information:
(a) Average Capital Employed is ₹ 6,00,000.
(b) Net Profit/(Loss) of the firm for the last three years ended are:
31st March, 2018 − ₹ 2,00,000, 31st March, 2017 − ₹ 1,80,000, and 31st March, 2016 − ₹ 1,60,000.
(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of ₹ 1,00,000 to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) is ₹ 7,00,000 whereas Partners' Capital is ₹
6,00,000 and Outside Liabilities ₹ 1,00,000.