Average
Profit Method :
Q.2. The goodwill of a firm is valued at 4 years' purchase of average profits of
years. The profits of the last five years were :
last five
Year Profit ()
2017-18 2,00,000
2018-19 (3,00,000)
2019-20 4,50,000 (including an abnormal gain of ?50,000)
2020-21 3,50,000 (after charging an abnormal loss of 290,000)
2021-22 2,60,000
Calculate the amount of goodwill.
JAns. Goodwill 8,00,000]
0. 3. X purchased the business of Y from Ist April, 2024. 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 ()
31st March, 2021 Profit 1,00,000 (after debiting loss of stock by fire
50,000)
2022 Loss 1,50,000 (includes voluntary retirement
compensation paid 80,000)
2023 Profit 1,50,000
2024 Profit 2,00,000
following:
Verification of books of accounts revealed the
ended 31 st March, 2022, a machine got destroyed in accident
() During the year
60,000 was written off as loss in Profit & Loss Account.
and
Two Computers costing ?40,000 each were purchased and
() On Ist July 2022, Account on which depreciation is to
be
debited to Travelling Expenses
Were Method.
charged @ 10% p.a. on Straight Line
Calculate the value of goodwill.
[Ans. Goodwill 1,39,000.1]
72,24,000 and for 2024
?1,92,000.
Hint. Profit for the March 2023
year ended 31st
and
firm
sharing
profits
losses in thee
on
partners in a
2.26
for 1/4th share Ist April,; rain
A, Band Care into
partnership
average annual
Q. 4. decide totake
D 3 times
the
[Link]. They be valued at
goodwill is to whichever is higher.
The agreed profits proor fits
this purpose,
previous four
or five years are as follows : gootv
years
past five
purpose ofthe
2018 130,000
31st March 1,20,000
Year ending on 2019
ending on 31st March 1,50,000
Year 2020
ending on31st March 1,10,000
Year
ending on 31 stMarch 2021 2,00,000
Year
ending on 31st March 2022
Year
Goodwill.
Calculate the value of
[Ans. Goodwill 74,35,000]
sharing profits and losses equally. They agree o
Q. 5. A, Band Care partners goodwill is to be valued at 3years purchase
admit Dfor equal share. For this purpose
years which were as follows
:
of average profits of last 5
60,000 (Profit)
Year ending on 31st March 2018 1,50,000 (Profit)
Year ending on 31st March 2019 20,000 (Loss)
Year ending on 31 st March 2020 2,00,000 (Profit)
Year ending on 31st March 2021 1,85,000 (Profit)
Year ending on 31st March 2022
purchased and debited to
On 1st October, 2021 a computer costing 40,000 was
p.a. Calculate
office expenses account on which depreciation is to be charged (@25%
the value of goodwill.
[Ans. Goodwill 73,66,000.]
Hint : Adjusted profit of 2022 will be : 1,85,000 + 40,000 Depreciation 5,000 =
72,20,000.
Q. 6. The profits earned by a firm during the last four years were as follows :
Year ended 31st March Profits)
2019 80,000
2020 1,00,000
2021 1,10,000
2022 1,50,000
Calculate the value of goodwill on the basis of three year's purchase of weighted
average profits. Weightsto be are 1, and 4
used 2,3 profits for 2019,
respectively to the
2020, 2021 and 2022.
[Ans. Goodwill *3,63,000.]
Q.7. Following information is available about the business of a
firm : (i) Non-
() Profits : In 2020, 40,000; In 2021, 50,000; In 2022, T60,000,
recurring income of ?1,000 is included in the profits of 2021, (iii) Profits of 2020 have
H
been reduced by Z6,000 because goods were destroyed by fire, (iv) Goods have not
GOODWILL : CONCEPT AND VALUATION 2.27
insured but it is thought to
been insure them in future. The insurance premium is
astimated at 400 per year, (v) Reasonable remuneration of the
te F6,000 per year, but it has not been taken into account for proprietor of business
calculation of above
mentioned profits, (vi) Profits of 2022 include 5,000 income on investment.
Goodwill is agreed to be valued at two years' purchase of the weighted average
profits of the past three years. The appropriate weights to be used are :-
2020-1; 2021 -2; 2022 3.
[Ans. Value of Goodwill 90,200.]
0. 8. 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 i, 2, 3, 4and 5,
the greatest weightage tobe given to lastyear. Profits of the last five years were :
Year ended )
31st March, 2020: Profit 80,000
2021 : Profit 1,05,000 (after considering abnormal loss
of 41,500)
2022: Loss 20,000 (after considering abnormal gain
of 40,000)
2023 : Profit 1,80,000
2024: Profit 2,00,000
Books of Accounts of the firm revealed that :
(i) Closing Stock as on 31st March, 2020 was overvalued by 40,000.
(ii) Repairs to Machinery 60,000 were wrongly debited to Machinery Account
on 1st July, 2022. Depreciation was charged on Machinery @ 20% p.a. on
diminishing balance method.
[Ans. Value of Goodwill 73,60,000.]
March 2023 5,16,000 and 2024
Hint : Weighted Profit for the year ended 31st
710,51,000.
Super Profit Method :
partnership firm earned net profits during the last four years as follows :
Q.9. A
Year
1 56,000
64,000
3 60,000
4 62,000
period has
in the firm throughout the above mentioned
The capital investment
to the risk involved, 15% is considered to be a fair
been 3,00,000. Having regard
return on the capital. average super
of goodwill on the basis of 3 years' purchase of
Calculate the value
above-mentioned four years.
profits earned during the
[Ans. 46,500.]
and the market rate
of the firm of Anuj and Benu is Z10,00,000
2 10. The capital
GOODWILL : CONCEPT ND
2.28
three years were 2,80,000,
Annual to the partners
salary3,80,000 and
is 60,000each.
24,20,000. Goodwill
VLUNTIO
The profit ior The ao,
of the firm sIg
of interest is 15%.
valued on the basis of two years purchase of last three years average Super proit,
the firm.
(C.B.S.E. .2019,
Calculate the goodwill of
[Ans. Goodwill R1,80,000]
employed from the following information .
Q. 11. Find out the capital 12%
Normal rate of return:
Profits : 2021-22 80,000
7 1,30,000
2022-23
2023-24
7 1,56,000
Profits? 1,50,.000
Goodwillvalued at 3 years purchase of Super
[Ans. Capital Employed R6,00,000]
Q. 12. Value of Goodwill of a firm at 3 years' purchase of Super Prof.
73,75,000. Average Capital Employed in the firm is 15,00,000. Profits of the last 3
years are:
2022-23 1,00,000 (Loss)
2023-24 5,35,000 Profit
2024-25 4,80,000 Profit
Find out the Normal Rate of Return.
[Ans. Normal Rate of Return 12%.]
Q. 13. A and Bare partners. They admit Cforth share in profits. For this purpose
goodwillis to be valued at three year's purchase of super profits.
Following information is provided to you :
A'sCapital 5,00,000
B'sCapital 4,00,000
General Reserve 1,50,000
Profit & Loss A/c (Cr.) 30,000
Sundry Assets 12,00,000
The normal rate of returnis 15% p.a. Average Profits are 2,00,000per year. YOu
are required to calculate C's share of goodwilI.
JAns. C's share of goodwill 728,500.]
Hint. Sundry Assets will be ignored.
Q. 14. On April Ist 2024, an existing firm had assets of 75.00,000
of 20,000. The firm had a General Reserve of 790,000, partner's including cast
showed a balance of 3,80,000and creditors amounted to 30.000. Ifcapital accouns
the normal rale
of return is 20% and the goodwillof the firm is valued at
of super profit, find the average profits of the firm.
64,000at 4 year's purchas
[Ans. 1,10,000]
COODWILL : CONCEPT AND VALUATICON
2.29
0. 15. In a partnership firm total capital of partners
Loss A/c (Debit) is 3,00,000. is ?12,00,000 and balance in
Profit & Average profits
Ifthe goodwill of the firm is 60,000 at 4 years' purchase of pastof super
3 years profits, find the
are 1,05,000.
normal rate
ofreturn.
[Ans. Normal Rate of Return is 10%.]
Capitalisation Method:
16. The average profits of a firm is
of outside liabilities is 48,000, The total assets of the firm are
S,00,000. Value 5,00,000. Average rate
business is 12%. of return in the same
Calculate goodwill from capitalisation of average profits method.
[Ans. 1,00,000.]
Hint : Capital Employed = Assets - Outside Liabilities.
o 17. A firm's average net profits of last four years were
2,50,000. It includes
abnormal profittof?19,000 each year. The firm had assets of R15,50,000 including
hof20,000, Debtors 2,35,000 and Stock1,15,000. Its creditors were 3,00,000
and outstanding expenses R50,000. The value of the goodwill as per the capitalization
of average profit methodwas valued at 4,50,000. Find out the Normal Rate of Return.
[Ans. Normal Rate of Return is 14%.]
Q. 18. Raju and Rinku were partners sharing profits and losses in the ratio 3:2.
They admitted Sumit as a newW partner for 1/3 [Link] the date of admission Capitals
of Raju and Rinku were ?5,50,00 and 6,50,000 respectively, also, General Reserve
of 73,00,000 and Profit and Loss (Dr.) balance of 1,00,000 were appearing in the
books of accounts. Fim made an average profit of 2,40,000 during the last few years
and the normal rate of earning was expected to be 12%. Calculate the Goodwill of the
firm by Capitalisation Method. (C.B.S.E. Practice Question Paper, 2024)
[Ans. T6,00,000]
Q. 19. Calculate the value of goodwill according to capitalisation of Super Profits
Method in the previous Q. 16.
[Ans. 1,00,000]
Q. 20. The following information relates to a partnership firm :
(a) Profits/Losses for the last six years :
20,000 Profit 4th year T60,000 Profit
lst year 750,000 Profit
2nd year 60,000 Profit 5th year
6th year 72,000 Profit
3rd year 10,000 Loss
(D) Average Capital Employed is 2,00,000.
(c) Rate of normal profit is 15%.
Find out the value of goodwill on the basis of :
)Four years' purchase of average profits.
)Four years' purchase of super profits.
(i) Capitalisation of average profits.
(i) Capitalisation of super profits
GOODWILL: CONCEPT AND
2.30
[Ans. ()On the basis ofaverage profits VALUNTON
{1,68,000
7 48,000
(i) On the basis of super profits
(ii) On the basis of capitalisation of average profits 80,000
(iv)On the basis of capitalisation of super profits
ADDITIONAL QUESTIONS
Valuation of Goodwill
Q. 21. Calculate the value of goodwill as on Ist April, 2022, on the basis
of 2
year's purchase of the average profits of the last five years. The profits and losses
the years ending 31st March were: 2017 80,000; 2018 1,00,000; 2019
30,000; 2020 1,70,000; 2021 7\,60,000 and2022 1,80,000. You are informed Loss
the profits of the year ending 31st March 2021 included profit on sale of a fixed that
amounting to 50,000 and the profits for the year 2022 were effected by a loss d asset
fire amounting to 20,000.
[Ans. 2,75,000.]
Hint. Profit for the year 2017 will be ignored.
Q. 22. Calculate the value of goodwill at 2 year's purchase of the average profits
of the last 3 years. The profit for the first year was 50,000, for second year twice the
profit of first year and for the third year one and half times the profit of the second
year.
[Ans. 2,00,000]
Q. 23. Rishi and Suman were partners in a firm. Their capitals were
71,20,000 and Suman 80,000. The normal rate of return in similar business is: Rishi
The profits of the last four years were : 12%.
Year
2019-20 33,000
2020-21 31,000
2021-22 25,000
2022-23 34,000
Calculate goodwill of the firm based on:
(i) Three years' purchase of the last three
years' average profits.
(ii) Capitalisation of last 3 years' super profit.
(C.B.S.E. 2024, MP)
[Ans. Goodwill (i) 90,000(ii) 50,000]
Hint : Average Profit of last 3 years is 30,000
Q.24.A firm earns a profit of 37,000per year. In
1S generally expected. The total assets of the firm are the same business a 10o retu
liabilities is 90,000. Find out the value of 4.00,000. The value of outside
goodwill.
[Ans, Goodwill Z60,000.]
Q. 25. An existing
creditors amounted firm had assets of 4,00,000 including cash of 15,000. Its
to 720,000 on that date. The
balance of 73,00,000 and partner's capital accounts showed a
reserves amounted to 80,000. Ifthe normal rate of return is
GOODWILL: :CONCEPT AND VALUATION
2.31
10%and the goodwill of the firm is valued at 75,000 at 3 year's purchase of super
find the average profits of the firm.
protits,
[Ans. 63,000.]
Q. 26. Yash and Karan were partners in an interior designer firm. Their fixed
capitals were Z6,00,000 and 4,00,000 respectively. There were credit balances in
their current accounts of 4,00,000 and 5,00,000 respectively. The firm had a
balance of 1,00,000in General Reserve. The firm did not have
any liability. They
admittedI Radhika into partnership for 1/4th share in the profits of the firm. The average
profits of the firm for the last five years were 5,00,000. Calculate the value of
goodwillI of the firm by capitalization of average profits method. The normal rate of
return
int the business is 10%. (C.B.S.E. 2020, Lucknow, Kolkata)
JAns. Goodwill 30,00,000.1
Q. 27. A business has earned average profits of 1,00,000 during the last few
years and the normal rate of returnin similar business is 10%. Find out the value of
Goodwill by :
(i) Capitalisation of super profit method and
i) Super profit method if the goodwill is valued at 3 years purchase of super
profit.
The assets of the business were 10,00,000 and its external liabilities
T1,80,000.
JAns. (i) As per capitalisation of Super Profits 1,80,000; (ii) As per Super Profits
754,000.]
follows:
0.28. A Partnership firm earned net profits during the last three years as
Years Net Profit ()
2021-22 1,90,000
2022-23 2,20,000
2023-24 2,50,000
the above mentioned period has been
The capital employed in the firm throughout15% is considered to be a fair return on
74,00,000. Having regard to the risk involved,
remuneration of all the partners during this period is estimated to be
the capital. The
71,00,000 per annum.
Calculate the value of goodwill on the
basis of () two year's purchase of super
(ii) by
profits earned on average basis during
the above mentioned three years and
capitalisation of average profits method.
Super Profits 1,20,000; (i) As per Capitalisation of Average
|Ans. () As per
Profits 4,00,000.]
is 3,00,000. Total assets of the firm are
firm
229. Average profit of the 20,00,000. If normal rate of return in a
Capital is
24,00,000 whereas Partner's
employed, what is the value of goodwill by
similar of the
business is 12% capital
Capitalisation of Super Profit?
[Ans. Value of Goodwill 75,00,000]
2.32
GOODWILL: CONCEPT ANDVALUATION
Q. 30. The following information relates to a partnership firm:
(a) Sundry Assets of the firm T6,80,000. Outside Liabilities 60,000.
(b) Profits and losses for the past years: Profit 2021 50,000: Loss 2022
10,000; Profit 2023 1,64,000and Profit 2024 1,80,000.
(c) The normal rate of return in a similar type of business is 12%.
Calculate the value of goodwill on the basis of:
(i) Three year's purchase of average profits.
(i) Three year's purchase of super profits.
(üi) Capitalisation of average profits, and
(iv) Capitalisation of super profits.
[Ans.() *2, 88,000; (i) 64,800; (i) 1,80,000 and (iv) 1,80,000]
