Double Entry Book Keeping Ts Grewal Vol. I 2018 for Class 12 Commerce Accountancy Chapter 2

Question 1:

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

Answer:

Number of years’ purchase = 3

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.

Answer:

$Goodwill = Average Profits \times Number of Years' Purchase \begin{matrix} \begin{array}{rcl} Average Profits & = & \frac{Total Profits}{Number of Years} \\ = & \frac{4, 00, 000 + 3, 98, 000 + 4, 50, 000 + 4, 45, 000 + 5, 00, 000}{5} \\ = & \frac{21, 93, 000}{5} = Rs 4, 38, 600 \end{array} \end{matrix} Goodwill = 4, 38, 600 \times 4 = Rs 17, 54, 400$

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

Answer:

Number of years’ purchase = 3

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.

Answer:

$\begin{array}{l} Goodwill = Average Profit \times No. of years' purchase \\ = 2,00,000 \times 1.5 = Rs 3,00,000 \end{array}$

Working Notes:

WN: 1 Calculation of Profits of last three years

Year	Profit
1^st Year	1,00,000
2^nd Year	2,00,000 (1,00,000 $\times$ 2)
3^rd Year	3,00,000 (2,00,000 $\times$ 1.5)
Total Profit	6,00,000

WN: 2 Calculation of Average Profit

$\begin{array}{l} Average Profit = \frac{Total Profits for past given years}{Number of Years} \\ = \frac{6, 00, 000}{3} = Rs 2,00,000 \end{array}$

Question 5:

A and B are partners sharing profits in the ratio of 3 : 2. They decided to admit C as a partner from 1st April, 2018 on the following terms:
(i) C will be given 2/5th share of the profit.
(ii) Goodwill of the firm 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:
2018 – Profit ₹ 30,000 ( after debiting loss of stock by fire ₹ 40,000).
2017 – Loss ₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).
2016 – Profit ₹ 1,10,000 (including a gain (profir) of ₹ 30,000 on the sale of fixed assets).
you are required to value the goodwell.

Answer:

Goodwill = Normal Average Profit × Number of years' purchase

Year	Actual Profit	+	Abnormal Loss Non-recurring	–	Abnormal Gain Non-recurring	=	Normal Profit
2018	30,000	+	40,000	–	Nil	=	70,000
2017	(80,000)	+	1,10,000	–	Nil	=	30,000
2016	1,10,000	+	Nil	–	30,000	=	80,000
Normal Profit for 3 Years							1,80,000

Number of years’ purchase is 2

Goodwill = 60,000 × 2 = Rs 1,20,000

Question 6:

X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z into partnership for 1/4th share in goodwill. Z brings in his share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2016 – Profit ₹ 50,000 (including profit on sale of assets ₹5,000).
2017 – Loss ₹ 20,000 (includes loss by fire ₹ 30,000)
2018 – Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
Calculate value of goodwill. Also, calculate goodwill brought in by Z.

Answer:

Year	Actual Profit	+	Abnormal Loss Non-recurring	–	Abnormal Gain Non-recurring	=	Normal Profit
2016	50,000	+	Nil	–	5,000	=	45,000
2017	(20,000)	+	30,000	–	Nil	=	10,000
2018	70,000	+	Nil	–	18,000+8,000	=	44,000
Normal Profit for 3 Years							99,000

Number of years’ purchase = 2

Question 7:

A and B are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take C into partnership for 1/4th share on 1st April, 2018. 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. The agreed profits for goodwill purpose of the past five years are:

Year	2013–14	2014–15	2015–16	2016–17	2017–18
Profit (₹)	14,000	15,500	10,000	16,000	15,000

Answer:

Calculation of Average Profit for Five Years

Year	Profit
2013 – 14	14,000
2014 – 15	15,500
2015 – 16	10,000
2016 – 17	16,000
2017 – 18	15,000
Total Profit	70,500

Calculation of Average Profit for Four Years

Year	Profit
2014 – 15	15,500
2015 – 16	10,000
2016 – 17	16,000
2017 – 18	15,000
Total Profit	56,500

Average Profit of four years is taken to compute the value of goodwill of the firm. This is because Average Profit of four years is more than the Average Profit of five years.

Question 8:

Sumit purchased Amit's business on 1st April, 2018. Goodwill was decided to be valued at two years' purchase of average normal profit of last four years. The profits for the past four years were:

Year Ended	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018
Profit (₹)	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, 2015.
(ii) A fixed asset was sold in the year ended 31st March, 2016 and gain (profit) of ₹ 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2017 assets of the firm were not insured due to oversight. Insurance premium not paid was ₹ 15,000.
Calculate the value of goodwill.

Answer:

$\begin{array}{l} Goodwill = Average Profit \times No. of years' purchase \\ = 1, 41, 250 \times 2 = Rs 2,82,500 \end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits

Year	Profit/(Loss) (Rs)	Adjustment	Normal Profit (Rs)
31 March, 2015	80,000	20,000	1,00,000
31 March, 2016	1,45,000	(25,000)	1,20,000
31 March, 2017	1,60,000	(15,000)	1,45,000
31 March, 2018	2,00,000	-	2,00,000
			5,65,000

WN: 2 Calculation of Average Profit

$\begin{array}{l} Average Profit = \frac{Total Profit for past given years}{Number of Years} \\ = \frac{5, 65, 000}{4} = Rs 1,41,250 \end{array}$

Question 9:

X and Y are partners in a firm. They admit Z into partnership for equal share. It was agreed that goodwill will be valued at three years' purchase of average profit of last five years. Profits for the last five years were:

Year Ended	31st March, 2014	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018
Profit (₹)	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 gain (profit) of ₹ 50,000 from sale of machinery sold in the year ended 31st March, 2015. 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, 2016 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2016 amounting to ₹ 1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.
Calculate the value of goodwill.

Answer:

$\begin{array}{l} Goodwill = Average Profit \times No. of years' purchase \\ = 1, 00, 000 \times 3 = Rs 3,00,000 \end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits

Year	Profit/(Loss) (Rs)	Adjustment	Normal Profit (Rs)
31 March, 2014	(90,000)	-	(90,000)
31 March, 2015	1,60,000	(50,000)	1,10,000
31 March, 2016	1,50,000	20,000	1,70,000
31 March, 2017	65,000	85,000*	1,50,000
31 March, 2018	1,77,000	(17,000)	1,60,000
			5,00,000

* Adjustment Amount

Overhauling cost of second hand machinery wrongly accounted as expense instead of capital expenditure. Profit to be increase by Rs 1,00,000	1,00,000
Depreciation to be debited from P&L A/c $(1, 00, 000 \times \frac{20}{100} \times \frac{9}{12})$	(15,000)
Amount to be added back	85,000

WN: 2 Calculation of Average Profit

$\begin{array}{l} Average Profit = \frac{Total Profit for past given years}{Number of Years} \\ = \frac{5, 00, 000}{5} = Rs 1,00,000 \end{array}$

Question 10:

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

Year ended	31st March, 2014	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018
Profit (₹)	20,000	24,000	30,000	25,000	18,000

Calculate 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, 2014, 2015, 2016, 2017 and 2018.

Answer:

Year	Profit	×	Weight	=	Product
2014	20,000	×	1	=	20,000
2015	24,000	×	2	=	48,000
2016	30,000	×	3	=	90,000
2017	25,000	×	4	=	1,00,000
2018	18,000	×	5	=	90,000
Total			15		3,48,000

Question 11:

A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2018, 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 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: 2015–16: ₹ 2,00,000; 2016–17: ₹ 2,30,000; 2017 015018: ₹ 2,50,000. The remuneration of the partners is estimated to be ₹ 90,000 p.a. Calculate amount of goodwill.

Answer:

Year	Profit before Partners’ Remuneration	–	Partners’ Remuneration	=	Profit after Partners’ Remuneration
2015-16	2,00,000	–	90,000	=	1,10,000
2016-17	2,30,000	–	90,000	=	1,40,000
2017-18	2,50,000	–	90,000	=	1,60,000

Year	Profit	×	Weight	=	Product
2015-16	1,10,000	×	1	=	1,10,000
2016-17	1,40,000	×	2	=	2,80,000
2017-18	1,60,000	×	3	=	4,80,000
	Total		6		8,70,000

$Weighted Average Profit = \frac{Total Product of Profits}{Total of Weights} or, Weighted Average Profit = \frac{8, 70, 000}{6} = Rs 1, 45, 000$

Question 12:

Manbir and Nimrat are partners and they admit Anahat into partnership. It was agreed to value goodwill at three tears' purchase on Weighted Average Profit Method taking profits of last five years. Weights assigned to each year as 1, 2, 3, 4 and 5 respectively to profit for the year ended 31st March, 2014 to 2108. The profit 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, 2014.
(ii) There was an abnormal gain (profit) of ₹ 30,000 in the year ended 31st March, 2015.
(iii) Closing Stock as on 31st March, 2017 was overvalued by ₹ 10,000.
Calculate the value of goodwill.

Answer:

$\begin{array}{l} Goodwill = Weighted Average Profit \times No. of years' Purchase \\ = 1, 39, 000 \times 3 = Rs 4,17,000 \end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits:

Year	Profit/(Loss) (Rs)	Adjustment	Normal Profit (Rs)
31 March, 2014	70,000	20,000	90,000
31 March, 2015	1,40,000	(30,000)	1,10,000
31 March, 2016	1,00,000	-	1,00,000
31 March, 2017	1,60,000	(10,000)	1,50,000
31 March, 2018	1,65,000	10,000	1,75,000

WN: 2 Calculations of Weighted Average Profits:

Year	Normal Profit	Weight	Product
31 March, 2014	90,000	1	90,000
31 March, 2015	1,10,000	2	2,20,000
31 March, 2016	1,00,000	3	3,00,000
31 March, 2017	1,50,000	4	6,00,000
31 March, 2018	1,75,000	5	8,75,000
Total		15	20,85,000

$\begin{array}{l} Weighted Average Profit = \frac{Total of Profit Product}{Total of Weights} \\ = \frac{20, 85, 000}{15} = Rs 1,39,000 \end{array}$

Question 13:

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	2014-15	2015-16	2016-17	2017-18
Profit (₹)	1,01,000	1,24,000	1,00,000	1,40,000
Weight	1	2	3	4

On a scrutiny of the accounts, the following matters are revealed:
(i) On 1st December, 2016, 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 2015-16 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) In 2015-16, 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 machine @ 10% p.a. on reducing balance method.

Answer:

Particulars	2014-15	2015-16	2016-17	2017-18
Profits	1,01,000	1,24,000	1,00,000	1,40,000
Repair Capitalised			+30,000
Depreciation			(1,000)	(2,900)
Overvaluation of Closing Stock		(12,000)	12,000
Management Cost	(24,000)	(24,000)	(24,000)	(24,000)
Sale Proceeds Wrong Depreciation		(10,000)	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:

$Goodwill = Weighted Average Profits \times Number of Years' Purchase \begin{matrix} \begin{array}{rcl} Weighted Average Profits & = & \frac{Total of Product}{Total of Weights} \\ = & \frac{77, 000 + 1, 56, 000 + 3, 53, 700 + 4, 55, 640}{10} = Rs 1, 04, 234 \end{array} \end{matrix} Goodwill = 1, 04, 234 \times 3 = Rs 3, 12, 702$

Note 1: Depreciation on Rs 30,000 machinery is charged for only 4 months in the year 2016-17.

Note 2: Sale proceeds wrongly credited in 2015-16 have been deducted after adjusting for profit of Rs 1,000. No depreciation is charged, since date of sale is not given (assumed that the machinery is sold at the end of the year).

Question 14:

Gupta and Bose had a firm in which they had invested ₹ 50,000. On an 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 goodwill.

Answer:

Number of years’ purchase = 4

Question 15:

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.

Answer:

$Goodwill = Super Profit \times Number of Years' Purchase Super Profits = Average Profit - Normal Profit \begin{matrix} \begin{array}{rcl} Average Profits & = & \frac{Total Profits}{Number of Years} \\ = & \frac{30, 000 + 36, 000 + 42, 000}{3} = Rs 36, 000 \end{array} \end{matrix} \begin{matrix} \begin{array}{rcl} Normal Profits & = & Capital Employed \times Normal Rate of Return \\ = & 1, 00, 000 \times \frac{15}{100} = 15, 000 \end{array} \end{matrix} Super Profits = 36, 000 - 15, 000 = 21, 000 Goodwill = 21, 000 \times 2 = Rs 42, 000$

Question 16:

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.

Answer:

Number of years’ purchase = 2

Question 17:

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.

Answer:

Number of years’ purchase = 2

Question 18:

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

Year ended	31st March, 2018	31st March, 2017	31st March, 2016
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% in 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.

Answer:

Year	Profit before Partners’ Remuneration	–	Partners’ Remuneration	=	Actual Profit after Remuneration
2016	1,70,000	–	1,00,000	=	70,000
2017	2,00,000	–	1,00,000	=	1,00,000
2018	2,30,000	–	1,00,000	=	1,30,000

Number of years’ purchase = 2

Question 19:

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.

Answer:

Question 20:

Capital of the firm of Sharma and Verma is ₹ 2,00,000 and the market rate of interest is 15%. Annual salary to partners is ₹ 12,000 each. The profits for the last three years were ₹ 60,000; ₹ 72,000 and ₹ 84,000. Goodwill is to be valued at 2 years' purchase of last 3 years' average super profit.
Calculate goodwill of the firm.

Answer:

Year	Profit before Partner’s Salary	–	Partner’s Salary	=	Actual Profit after Salary
1	60,000	–	24,000	=	36,000
2	72,000	–	24,000	=	48,000
3	84,000	–	24,000	=	60,000

Question 21:

A and B are equal partners. They decide to admit C for 1/3rd share. For the purpose of admission of C, goodwill of the firm is to be valued at four years' purchase of super profit. Average capital employed in the firm is ₹ 1,50,000. Normal rate of return may be taken as 15% p.a. Average profit of the firm is ₹ 40,000. Calculate value of goodwill.

Answer:

Number of years’ purchase = 4

Question 22:

On 1st April, 2018, an existing firm had assets of ₹ 75,000 including cash of ₹ 5,000. Its creditors amounted to ₹ 5,000 on that date. The firm had a Reserve of ₹ 10,000 while Partners' Capital Accounts showed a balance of ₹ 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at ₹ 24,000 at four years' purchase of super profit, find average profit per year of the existing firm.

Answer:

Capital Employed = Total Assets − Creditors

= 75,000 − 5,000 = Rs 70,000

Goodwill of the firm = Rs 24,000

Number of years’ purchase = 4

Or, 24,000 = Super Profit × 4

Question 23:

The average profit earned by a firm is ₹ 1,00,000 which includes undervaluation of stock of ₹ 40,000 on an average basis. The capital invested in the business is ₹ 6,30,000 and the normal tare of return is 5%. Calculate goodwill of the firm on the basis of 5 time the super profit.

Answer:

Average Profit earned by a firm = Rs 1,00,000
Undervaluation of Stock = Rs 40,000
Average Actual Profit = Average Profit earned by a firm + Undervaluation of Stock
or, Average Actual Profit = 1,00,000 + 40,000 = Rs 1,40,000

Super Profit = Actual Average Profit – Normal Profit
or, Super Profit = 1,40,000 – 31,500 = Rs 1,08,500
Goodwill = Super Profit × Number of Times
Goodwill = 1,08,500 × 5 = Rs 5,42,500

Question 24:

Average profit earned by a firm is ₹ 7,50,000 which includes overvaluation of stock of ₹ 30,000 on an average basis. The capital invested in the business is ₹ 42,00,000 and the normal tare of return is 15%. Calculate goodwill of the firm on the basis of 3 time the super profit.

Answer:

Average Profit earned by a firm = Rs 7,50,000
Overvaluation of Stock = Rs 30,000
Average Actual Profit = Average Profit earned by a firm – Overvaluation of Stock
or, Average Actual Profit = 7,50,000 – 30,000 = Rs 7,20,000

Super Profit = Actual Average Profit – Normal Profit
or, Super Profit = 7,20,000 – 6,30,000 = Rs 90,000
Goodwill = Super Profit × Number of Times
Goodwill = 90,000 × 3 = Rs 2,70,000

Question 25:

Ayub and Amit are partners in a firm and they admit Jaspal into partnership w. e. f. 1st April, 2018. They agreed to value goodwill at 3 years' purchase of Super Profit Method for which they decided to average profit of last 5 years. The profit for the last 5 years were:

Year Ended	Net Profit (₹)
31st March, 2014	1,50,000
31st March, 2015	1,80,000
31st March, 2016	1,00,000	( Including abnormal loss of ₹ 1,00,000)
31st March, 2017	2,60,000	(Including abnormal gain (profit) of ₹ 40,000)
31st March, 2018	2,40,000

The firm has total assets of ₹ 20,00,000 and Outside Liabilities of ₹ 5,00,000 as on that date. Normal Rate of Return in similar business is 10%.
Calculate value of goodwill.

Answer:

$\begin{array}{l} Goodwill = Super Profit \times No. of Years' Purchase \\ = 48,000 \times 3 = Rs 1,44,000 \end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits:

Year	Profit/(Loss) (Rs)	Adjustment	Normal Profit (Rs)
31 March, 2014	1,50,000	-	1,50,000
31 March, 2015	1,80,000	-	1,80,000
31 March, 2016	1,00,000	1,00,000	2,00,000
31 March, 2017	2,60,000	(40.000)	2,20,000
31 March, 2018	2,40,000	-	2,40,000
		Total Profit	9,90,000

WN2: Calculation of Super Profits

$\begin{array}{l} Average Profit = \frac{Total Profit of past given years}{Number of Years} \\ = \frac{9, 90, 000}{5} = Rs 1,98,000 \\ Normal Profit = Capital Employed \times \frac{Normal Rate of Return}{100} \\ = 15,00,000 \times \frac{10}{100} = Rs 1,50,000 \\ Super Profit = Average Profit - Normal Profit \\ = 1,98,000 - 1,50,000 = Rs 48,000 \end{array}$

WN3: Calculation of Capital Employed

$\begin{array}{l} Capital Employed = Total Assets - Outside Liabilities \\ = 20,00,000 - 5,00,000 = Rs 15,00,000 \end{array}$

Question 26:

From the following information, calculate value of goodwill of the firm by applying Capitalisation Method: Total Capital of the firm ₹ 16,00,000.
Normal rate of return 10%. Profit for the year ₹ 2,00,000.

Answer:

Total Capital = Rs 16,00,000

Question 27:

A business has earned average profit of ₹ 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are ₹ 10,00,000 and its external liabilities are ₹ 1,80,000. The normal rate of return is 10%.

Answer:

$Goodwill = Capitalised Value of Average Profits - Actual Capital Employed \begin{matrix} \begin{array}{rcl} Capitalised Value of Average Profit & = & Average Profit \times \frac{100}{Nominal Rate of Return} \\ = & 1, 00, 000 \times \frac{100}{10} = 10, 00, 000 \end{array} \end{matrix} Actual Capital Employed = 10, 00, 000 - 1, 80, 000 = 8, 20, 000 Goodwill = 10, 00, 000 - 8, 20, 000 = Rs 1, 80, 000$

Question 28:

Form the following particulars, calculate value of goodwill of a firm by applying Capitalisation of Average Profit Method:
(i) Profits of last five consecutive years ending 31st March are: 2018–₹ 54,000; 2017–₹42,000; 2016–₹ 39,000; 2015–₹ 67,000 and 2014–₹ 59,000
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm ₹ 2,00,000.

Answer:

Question 29:

A business has earned average profit of ₹ 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method, and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profits.
Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.

Answer:

Average Profit – Rs 4,00,000
Normal Rate of Return – 10%

(i) Goodwill by Capitalisation of Super profit

Super Profit = Actual Profit – Normal Profit
= 4,00,000 – 3,28,000
= Rs 72,000

=Rs 7,20,000

(ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits

Therefore, Goodwill is valued at Rs 2,16,000

Question 30:

A firm earns profit of ₹ 5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsiders' liabilities as on the date of goodwill are ₹ 55,00,000 and ₹ 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.

Answer:

(i) Calculation of Goodwill by Capitalisation of Super Profit Method

Profit of the firm = Rs 5,00,000

(ii) Calculation of Goodwill by Capitalisation of Average Profit Method

Question 31:

Average profit of the firm is ₹ 2,00,000. Total assets of the firm are ₹ 15,00,000 whereas Partners' Capital is ₹ 12,00,000. If normal rate of return in a similar business is 10% of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?

Answer:

$\begin{array}{l} Goodwill = Super Profit \times \frac{100}{Normal Rate of Return} \\ = 80,000 \times \frac{100}{10} = Rs 8,00,000 \end{array}$

Working Notes:

WN1: Calculation of Super Profits

$\begin{array}{l} Average Profit = \frac{Total Profit for past given years}{Number of Years} \\ = Rs 2,00,000 \\ Normal Profit = Capital Employed \times \frac{Normal Rate of Return}{100} \\ = 12,00,000 \times \frac{10}{100} = Rs 1,20,000 \\ Super Profit = Average Profit - Normal Profit \\ = 2, 00,000 - 1,20,000 = Rs 80,000 \end{array}$

WN2: Calculation of Capital Employed

$\begin{array}{l} Capital Employed = Total Assets - Outside Liabilities \\ = 15,00,000 - 3,00,000 = Rs 12,00,000 \end{array}$

Question 32:

Rajan and Rajani are partners in a firm. Their capitals were Rajan ₹ 3,00,000; Rajani ₹ 2,00,000. During the year 2017-18, the firm earned a profit of ₹ 1,50,000. Calculate the value of goodwill of the firm by capitalisation of super profit assuming that the normal rate of return is 20%.

Answer:

$Goodwill = Super Profits \times \frac{100}{Nominal Rate of Return} Super Profits = Average Profit - Normal Profit Average Profit = 1, 50, 000 (Given) Normal Profit = Capital Employed \times Normal Rate of Return Normal Profit = (3, 00, 000 + 2, 00, 000) \times 20 % = 1, 00, 000 Super Profit = 1, 50, 000 - 1, 00, 000 = 50, 000 Goodwill = 50, 000 \times \frac{100}{20} = Rs 2, 50, 000$

Question 33:

Average profit of GS & Co. is ₹ 50,000 per year. Average capital employed in the business is ₹ 3,00,000. 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
(ii) Capitalisation of Super Profit Method.

Answer:

(i) $\begin{array}{l} Goodwill = Super Profit \times No. of Years' Purchase \\ = 20,000 \times 3 = Rs 60,000 \end{array}$

(ii) $\begin{array}{l} Goodwill = Super Profit \times \frac{100}{Normal Rate of Return} \\ = 2 0,000 \times \frac{100}{10} = Rs 2,00,000 \end{array}$

Working Notes:

WN1: Calculation of Super Profits

$\begin{array}{l} Average Profit = \frac{Total Profits for past given years}{No. of Years} \\ = Rs 50,000 \\ Normal Profit = Capital Employed \times \frac{Normal Rate of Return}{100} \\ = 3,00,000 \times \frac{10}{100} = Rs 30,000 \\ Super Profit = Average Profit - Normal Profit \\ = 50,000 - 3 0,000 = Rs 20,000 \end{array}$

Question 34:

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.

Answer:

$\begin{array}{l} (i) Goodwill = Average Profit \times No. of years' purchase \\ = 8 0,000 \times 3 = Rs 2,40,000 \end{array}$

$\begin{array}{l} (ii) Goodwill = Super Profit \times No. of years' purchase \\ = 2 0,000 \times 3 = Rs 60,000 \end{array}$

$\begin{array}{l} (iii) Goodwill = Super Profit \times \frac{100}{Normal Rate of Return} \\ = 2 0,000 \times \frac{100}{10} = Rs 2,00,000 \end{array}$

$\begin{array}{l} (iv) Goodwill = Capitalised Value - Net Assets \\ = 8,00,000 - 6,00,000 = Rs 2,00,000 \end{array}$

Working Notes:

WN1: Calculation of Average and Super Profits

$\begin{array}{l} Average Profit = \frac{Total Profits of past years given}{No. of Years} = \frac{2, 00, 000 + 1, 80, 000 + 1, 60, 000}{3} \\ = Rs 1,80,000, \\ Average Profit (Adjusted) = Rs 1,80,000 - 1,00,000 (Remuneration to partners) \\ = Rs 80,000 \\ Normal Profit = Capital Employed \times \frac{Normal Rate of Return}{100} \\ = 6,00,000 \times \frac{10}{100} = Rs 60,000 \\ Super Profit = Average Profit (Adjusted) - Normal Profit \\ = 80,000 - 6 0,000 = Rs 20,000 \end{array}$

WN2: Calculation of Capital Employed

$\begin{array}{l} Capital Employed = Total Assets - Outside Liabilities \\ = 7,00,000 - 1,00,000 = Rs 6,00,000 \end{array}$

Double Entry Book Keeping Ts Grewal Vol. I 2018 for Class 12 Commerce Accountancy Chapter 2 - Goodwill: Nature And Valuation

Page No 2.20:

Question 1:

Answer:

Page No 2.20:

Question 2:

Answer:

Page No 2.20:

Question 3:

Answer:

Page No 2.21:

Question 4:

Answer:

Page No 2.21:

Question 5:

Answer:

Page No 2.21:

Question 6:

Answer:

Page No 2.21:

Question 7:

Answer:

Page No 2.21:

Question 8:

Answer:

Page No 2.22:

Question 9:

Answer:

Page No 2.22:

Question 10:

Answer:

Page No 2.22:

Question 11:

Answer:

Page No 2.22:

Question 12:

Answer:

Page No 2.22:

Question 13:

Answer:

Page No 2.23:

Question 14:

Answer:

Page No 2.23:

Question 15:

Answer:

Page No 2.23:

Question 16:

Answer:

Page No 2.23:

Question 17:

Answer:

Page No 2.23:

Question 18:

Answer:

Page No 2.23:

Question 19:

Answer:

Page No 2.23:

Question 20:

Answer:

Page No 2.24:

Question 21:

Answer:

Page No 2.24:

Question 22:

Answer:

Page No 2.24:

Question 23:

Answer:

Page No 2.24:

Question 24:

Answer:

Page No 2.24:

Question 25:

Answer:

Page No 2.24:

Question 26:

Answer:

Page No 2.24: