TS Grewal Solution Class 12 Chapter 2 Goodwill Nature and Valuation (2018 2019)

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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 (Rs) 14,000 15,500 10,000 16,000 15,000
Answer 7:
Option 1 :
Goodwill under Average Profit Method = Average profit per year × Years Purchase
= × Years Purchase
= 56,400
Or
Option 2 :
Goodwill under Average Profit Method = Average profit per year × Years Purchase
= × Years Purchase
= 56,500
Goodwill of the firm will be the higher value of the above two options i.e, 56,400 or 56,500. So the
goodwill of the firm will be 56,500
PAGE NO 2.21:
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 (Rs) 80,000 1,45,,000 1,60,000 2,00,000
Books of Account revealed that:
(i) Abnormal loss of Rs 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 Rs 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
5
premium not paid was Rs 15,000.

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Calculate the value of goodwill.
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Answer 8:
Goodwill under Average Profit Method = Average Normal Profit per year × Years Purchase
= × Years Purchase
= ×2
= × 2 Years = 2,82,500
POINT OF KNOWLEDGE:-
Normal Profit for year 2015

Actual profit + Abnormal loss - Abnormal profit
80,000 + 20,000 - -
Normal Profit = 1,00,000

Actual loss + Abnormal loss - Abnormal profit
1,45,000 + - - 25,000

1,60,000 + - - 15,000

2,00,000 + - - -
PAGE NO 2.22:
Question 9:
X and Y are partners in a firm. They admit Z into partnership for equal share. It was agreed that goodwill
6
will be valued at three years' purchase of average profit of last five years. Profits for the last five years
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were:
Year Ended 31st March, 2014 31st March, 2015 31st March, 2016 31st March, 31st March, 2018

2017
Profit (Rs) 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 Rs 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 Rs 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 Rs 1,00,000
was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.
Answer 9:
Goodwill under Average Profit Method = Average Normal Profit per year × Years Purchase
= × Years Purchase
= × 3 Years
={ } × 3 Years
= 3,00,000
PAGE NO 2.22:
Question 10:
Profits of a firm for the year ended 31st March for the last five years were:
31st March,
Year ended 31st March, 2014 31st March, 2015 31st March, 2016 31st March, 2018
2017
Profit (Rs) 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 10:
Goodwill under Weighted Average Profit Method
= Weighted Average Profit per Year × Years Purchase
= × Years Purchase
={ } × 3 Years Purchase
={ }×3
= 69,600
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PAGE NO 2.22:


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: Rs 2,00,000;
2016–17: Rs 2,30,000; 2017 015018: Rs 2,50,000. The remuneration of the partners is estimated to be Rs
90,000 p.a. Calculate amount of goodwill.
Answer 11:
Goodwill under weighted Average Profit Method

= Weighted Average profit per year × Years Purchase
= × Years Purchase
={ } × 2 Years
= 2,90,000
PAGE NO 2.22:
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: Rs 70,000, Rs 1,40,000, Rs 1,00,000, Rs 1,60,000 and Rs 1,65,000
respectively.
Scrutiny of books of account revealed following information:
(i) There was an abnormal loss of Rs 20,000 in the year ended 31st March, 2014.
(ii) There was an abnormal gain (profit) of Rs 30,000 in the year ended 31st March, 2015.
(iii) Closing Stock as on 31st March, 2017 was overvalued by Rs 10,000.
Answer 12:
Goodwill under weighted Average profit method
= Weighted Average profit per year × Years Purchase
= × Years Purchase
= } × 3 Years
={ } × 3 Years
={ } × 3 Years
=( ) × 3 Years
= 4,17,000
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PAGE NO 2.22:


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 (Rs) 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 Rs 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 Rs 12,000.
(iii) To cover management cost, an annual charge of Rs 24,000 should be made for the purpose of goodwill
valuation.
(iv) In 2015-16, a machine having a book value of Rs 10,000 was sold for Rs 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 13:
Goodwill under weighted Average Profit Method

= weighted Average profit per year × Years Purchase
= × Years Purchase
={ × 3 Years Purchase
={ } × 3 Years Purchase
={ } × 3 Years
= 3,12,702
Points of Knowledge :
Statements showing adjustment :

Note 1: Book value of machine includes 1,000 depreciation . So profit on sale of machine 1,000 which was
wrongly credited as 11,000, should be rectified by debiting 10,000 to the profits of the second year.
Years Profit Repairs Dep. Stock Expenses Wrong Cr. Dep. Adj. Profit
First Year 1,01,000 -24,000 77,000

Second Year 1,24,000 -12,000 -24,000 -10,000 78,000
Third Year 1,00,000 +30,000 -1,000 +12,000 -24,000 +900 1,17,900
Fourth Year 1,40,000 -2,900 -24,000 +810 1,13,910
PAGE NO 2.23:
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Question 14:


Gupta and Bose had a firm in which they had invested Rs 50,000. On an average, the profits were Rs
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. Value th goodwill.
Answer 14:
Goodwill under Super Profit Method = Super Profit × Years Purchase

=(Actual or Average Profit – Normal Profit) × Years Purchase
=(16,000 – 50,000 × 15%) × 4 Years
=(16,000 – 7,500) × 4 Years
=8,500 × 4 Years
=42,000
PAGE NO 2.23:
Question 15:
The total capital of the firm of Sakshi, Mehak and Megha is Rs 1,00,000 and the market rate of interest is
15%. The net profits for the last 3 years were Rs 30,000; Rs 36,000 and Rs 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 15:

=(Average Profit – Normal Profit) × Years Purchase
=(36,000 – 1,00,000 × 15%) × 2 Years
=(36,000 – 15,000) × 2 Years
=21,000 × 2 Years
=42,000
Average Profit per Year =
={
= 36,000
PAGE NO 2.23:
Question 16:
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The average net profit expected in future by XYZ firm is Rs 36,000 per year. Average capital employed in
the business by the firm is Rs 2,00,000. The normal rate of return from capital invested in this class of
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business in 10%. Remuneration of the partners is estimated to be Rs 6,000 p.a. Find out the value of
goodwill on the basis of two years' purchase of super profit.

Answer 16:

=(Actual Profit – Remuneration of Partners – Normal Profit) × Years Purchase
=(36,000 – 6,000 – 2,00,000 ×10%) × 2 Years Purchase
=(36,000 – 6,000 – 20,000) × 2 Years Purchase
=10,000 × 2 Years
=20,000
PAGE NO 2.23:
Question 17:
A partnership firm earned net profits during the last three years ended 31st March, as follows: 2016–Rs
17,000; 2017–Rs 20,000; 2018–Rs 23,000.
The capital investment in the firm throughout the above-mentioned period has been Rs 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 17:

=(Average Profit – Normal Profit) × Years Purchase
=(20,000 – 80,000 × 15%) × 2 Years
=(20,000 – 12,000) × 2 Years
=8,000 × 2 Years
=16,000
={
= 20,000
PAGE NO 2.23:
Question 18:
A partnership firm earned net profits during the past three years as follows:
11
Year ended 31st March, 2018 31st March, 2017 31st March, 2016
Net Profit (Rs) 2,30,000 2,00,000 1,70,000
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Capital investment in the firm throughout the above-mentioned period has been Rs 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 Rs 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 18:
=(Average Profit – Partner’s Commission – Normal Profit) × Years Purchase
=(2,00,000 – 1,00,000 – 4,00,000 × 15%) × 2 Years
=(2,00,000 – 1,00,000 – 60,000) × 2 Years
=40,000 × 2 Years
= 80,000
={ }
= 2,00,000
PAGE NO 2.23:
Question 19:
A business earned an average profit of Rs 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 Rs
22,00,000 and Rs 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if
it is valued at 212/212 years' purchase of super profits.
Answer 19:
Goodwill under Super Profit Method = Super Profit × Year’s Purchase

=(Average Profit – Normal Profits) × Year’s Purchase
=(Average Profit – (Assets – Liabilities) ×10%) × Years Purchase
=(8,00,000 – (22,00,000 – 5,60,000) × 10%) × 2.5 Years Purchase
=(8,00,000 – 16,40,000 × 10%) × 2.5 Years Purchase
=(8,00,000 – 1,64,000) × 2.5 Years Purchase=6,36,000 × 2.5 Years
=15,90,000
PAGE NO 2.23:
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Question 20:
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Capital of the firm of Sharma and Verma is Rs 2,00,000 and the market rate of interest is 15%. Annual
salary to partners is Rs 12,000 each. The profits for the last three years were Rs 60,000; Rs 72,000 and Rs

84,000. Goodwill is to be valued at 2 years' purchase of last 3 years' average super profit.
Calculate goodwill of the firm.
Answer 20:
Goodwill under Super Profit Method = Super Profit × Year’s Purchase
= (Average Profit – Normal Profit) × Year’s Purchase
= (Average Profit – Capital Employed) × % of Normal Rate of Return)×Years Purchase
= (48,000 – 2,00,000 × 15%)×2 years Purchase
= (48,000 – 30,000) × 2 Years
= 18,000 × 2 Years
= 36,000
Average Profit per year =
={ }
= 48,000
PAGE NO 2.24:
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 Rs 1,50,000. Normal rate of return may be taken as 15% p.a. Average profit of the firm is Rs 40,000.
Calculate value of goodwill.
Answer 21:
=(Average Maintainable Profit – Normal Profit) × Years Purchase
=(40,000 – 1,50,000 × 15%) × 4 years Purchase
=(40,000 – 22,500) × 4 years
= 17,500 × 4 years
= 70,000
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PAGE NO 2.24:
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Question 22:
On 1st April, 2018, an existing firm had assets of Rs 75,000 including cash of Rs 5,000. Its creditors
amounted to Rs 5,000 on that date. The firm had a Reserve of Rs 10,000 while Partners' Capital Accounts
showed a balance of Rs 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at Rs
24,000 at four years' purchase of super profit, find average profit per year of the existing firm.
Answer 22:
Goodwill Under Super Profit Method
or Goodwill = Super Profit × Year’s Purchase
or Goodwill = (Average Profit – Normal Profit)×Years Purchase
or 24,000 = (Average Profit – 14,000) × 4 Years Purchase
or ( ) = Average Profit – 14,000
or 6,000 = Average Profit – 14,000
or Average Profit = 14,000 + 6,000
or Average Profit = 20,000
Capital Employed = Assets – Creditors = 75,000 – 5,000 = 70,000
= Capital + Reserve Fund = 60,000 + 10,000 = 70,000
Normal Rate of Return = 20%
Normal Profit = 70,000 × 20% = 14,000
PAGE NO 2.24:
Question 23
The average profit earned by a firm is Rs 1,00,000 which includes undervaluation of stock of Rs 40,000 on
an average basis. The capital invested in the business is Rs 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 23:
= Super Profit × Times Purchase

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= (Average Profit + Under Valuation of Stock – Normal Profit)×Times Purchase

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=(1,00,000 + 40,000 – 6,30,000 × 5%) × 5 Times Purchase
=(1,00,000 + 40,000 – 31,500 ) × 5 Times Purchase
=1,08,500 × 5 Times Purchase
=5,42,500
PAGE NO 2.24:
Question 24:
The average profit earned by a firm is Rs 7,50,000 which includes overvaluation of stock of Rs 30,000 on
an average basis. The capital invested in the business is Rs 4,20,000 and the normal tare of return is 15%.
Calculate goodwill of the firm on the basis of 3 time the super profit.
Answer 24:
= Super Profit × Times Purchase
= (Average Profit – Over Valuation of Stock – Normal Profit)×Times Purchase
=(7,50,000 – 30,000 – 42,00,000 × 15%) × 5 Times Purchase
=(7,50,000 – 30,000 – 6,30,000) × 5 Times Purchase
=90,000 × 3 Times Purchase
=2,70,000
PAGE NO 2.24:
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 (Rs)
31st March, 2014 1,50,000
31st March, 2015 1,80,000
31st March, 2016 1,00,000 ( Including abnormal loss of Rs 1,00,000)
31st March, 2017 2,60,000 (Including abnormal gain (profit) of Rs 40,000)
31st March, 2018 2,40,000
The firm has total assets of Rs 20,00,000 and Outside Liabilities of Rs 5,00,000 as on that date. Normal
Rate of Return in similar business is 10%.
Calculate value of goodwill.
Answer 25:
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Value of Goodwill under super Profit Method
= Super Profit × Years Purchase
= 48,000 × 3 Years
= 1,44,000
Actual or Average Profit
={ }
= 1,98,000
Actual Capital = Assets – Liabilities
= 20,000,00 – 5,00,000
= 15,00,000
Normal Profit = Actual Capital × Rate of Return
= 15,00,000 × 10/100
= 1,50,000
Super Profit = Average Profit – Normal Profit
= (1,98,000 – 1,50,000)
= 48,000
PAGE NO 2.24:
Question 26:
From the following information, calculate value of goodwill of the firm by applying Capitalisation Method:
Total Capital of the firm Rs 16,00,000.
Normal rate of return 10%. Profit for the year Rs 2,00,000.
Answer 26:
16
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Goodwill under Capitalisation Method
= Expected Capital – Actual Capital
= Profit for the year × Reverse of Reasonable Rate of Return – Actual Capital
= 2,00,000 × 100/10 – 16,00,000
= 20,00,000 – 16,00,000
= 4,00,000
PAGE NO 2.24:
Question 27:
A business has earned average profit of Rs 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 Rs 10,00,000 and its external
liabilities are Rs 1,80,000. The normal rate of return is 10%.
Answer 27:
Actual or Average Profit Rs. 1,00,000
Capitalised value of Average Profit
= 1,00,000 × 100/10
0r Expected Capital = 10,00,000
= 10,00,000 – 1,80,000
= 8,20,000
Value of Goodwill under Capitalisation of Average Profit Method
= Capitalised Value of Average Profit – Actual Capital
= 10,00,000 – 8,20,000
= 1,80,000
PAGE NO 2.24:
Question 28:
17
Form the following particulars, calculate value of goodwill of a firm by applying Capitalisation of Average
Profit Method:
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(i) Profits of last five consecutive years ending 31st March are: 2018–Rs 54,000; 2017–Rs42,000; 2016–Rs


39,000; 2015–Rs 67,000 and 2014–Rs 59,000

(ii) Capitalisation rate 20%.
(iii) Net assets of the firm Rs 2,00,000.
Answer 28:
Value of Goodwill by applying Capitalisation of average profit Method
= Capitalisation of Average Profit or Expected Capital – Actual Capital
= 2,61,000 – 2,00,000
= 61,000
Average profit per year =
={ }
= 52,200
= Capitalisation of Average Profit or Expected Capital
= 52,200 × 100/20
= 2,61,000
Net Assets = Actual Capital = 2,00,000
PAGE NO 2.25:
Question 29:
A business has earned average profit of Rs 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 Rs 40,00,000 and its external liabilities Rs 7,20,000.
Answer 29:
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Actual or Average Profit Rs. 4,00,000
Capitalised Value of Average Profit = 4,00,000 ×
Or Expected capital = 40,00,000
= 40,00,000 – 7,20,000
= 32,80,000
Value of Goodwill under Capitalisation of Average Profit

Method
= Capitalised value of Average Profit – Actual Capital
= 40,00,000 – 32,80,000 × 10/100
= 7,20,000
Super Profit = Average Profit – Normal Profit
= 4,00,000 – 32,80,000 × 10/100
= 4,00,000 – 3,28,000
= 72,000
(1) Value of Goodwill under Capitalisation of Super Profit Method
= Super Profit × Reverse Rate of Return
= 72,000 × 100/10
= 7,20,000
(2) Value of Goodwill Under Super Profit Method
= Super Profit × Years Purchase
= 72,000 × 3 Years Purchase
= 2,16,00
PAGE NO 2.25:
Question 30:
A firm earns profit of Rs 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 Rs 55,00,000
and Rs 14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit
Method as well as Capitalisation of Average Profit Method.
19
Answer 30:
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Total Assets = Assets Excluding Stock + Stock
1,00,000 + 20,000 = 1,20,000
Capital = Assets – Current Liabilities
1,20,000 – 10,000
1,10,000
Goodwill Under Super Profit Method = Super Profit × Year’s Purchase
Goodwill Under Super Profit Method = (Average Profit – Normal Profit)
60,000 = (Average Profit – 1,10,000 × 8/100) × 4 Years
60,000 = (Average Profit – 8,800) × 4 Years
60,000 + 4 + 8,800 = Average Profit
Average or Actual Profit = 23,800
PAGE NO 2.25:
Question 31:
Average profit of the firm is Rs 2,00,000. Total assets of the firm are Rs 15,00,000 whereas Partners'
Capital is Rs 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 31:
Goodwill by Capitalisation of Super Profit Method = Super Profit × Reverse Rate of Return
( Average Profit – Normal Profit ) × Reverse of Rate of Return
( Average Profit – Capital Employed × Normal Rate of Return) × Reverse of Rate of Return
( 2,00,000 – 12,00,000 × )×
( 2,00,000 – 1,20,000 ) ×
80,000 ×
8,00,000
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PAGE NO 2.25:
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Question 32:


Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs 3,00,000; Rajani Rs 2,00,000. During
the year 2017-18, the firm earned a profit of Rs 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 32:
Goodwill by Capitalisation of Super Profit Method = Super Profit × Reverse Rate of Return
( Actual Profit – Normal Profit ) × Reverse of Rate of Return
( Actual Profit – Capital Employed × Normal Rate of Return) × Reverse of Rate of Return
( 1,50,000 – 5,00,000 × ) × Reverse of Rate of Return
( 1,50,000 – 1,00,000 ) ×
50,000 ×
2,50,000
PAGE NO 2.25:
Question 33:
Average profit of GS & Co. is Rs 50,000 per year. Average capital employed in the business is Rs
3,00,000. If the normal rate of return of 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 33:
(1) Goodwill by Super Profit Method at three year’s Purchase
( Average Profit – Normal Profit ) × Years Purchase
( Average Profit – Capital Employed × Normal Rate of Return) × Year’s Purchase
( 50,000 – 3,00,000 × ) × Year’s Purchase
( 50,000 – 30,000 ) × 3 years Purchase
20,000 × 3 Years
60,000
(2) Goodwill by capitalisation of Super Profit Method

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( Average Profit – Normal Profit ) × Reverse of Rate of Return
( Average Profit – Capital Employed × Normal Rate of Return) × Reverse of Rate of Return
( 50,000 – 3,00,000 × ) × Reverse of Rate of Return
( 50,000 – 30,000 ) ×
2,00,000
PAGE NO 2.25:
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 Rs 6,00,000.
(b) Net Profit/(Loss) of the firm for the last three years ended are:
31st March, 2108–Rs 2,00,000, 31st March, 2107–Rs 1,80,000, and 31st March, 2106–Rs 1,60,000.
(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of Rs 1,00,000 to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and not-trade investments) is Rs 7,00,000
whereas Partners' Capital is Rs 6,00,000 and Outside Liabilities Rs 1,00,000.
Answer 34:
(1) Goodwill at three years purchase of Average profits = Average profit pe × Years Purchase
= × Years Purchase
= ×3 years
= 80,000 × 3years
= 2,40,000
(2) Goodwill by super profit method at three years purchase = Super Profit × Years Purchase
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(Average Profit – Normal Profit) × Years Purchase
(Average Profit – Capital Employed × Normal Rate of return) × Years Purchase
- 6,00,000 ×
= (80,000 – 60,000) × 3years purchase
= 20,000 × 3Years
= 60,000
(3) Goodwill by capitalisation super profit method = Super Profit × reverse rate of return
(Average Profit – Normal Profit) × Reverse rate of return
(Average Profit – Capital Employed × Normal Rate of return) × reverse of rate of return
- 6,00,000 ×
= (80,000 – 60,000) ×
= 20,000 ×
= 2,00,000
(4) Goodwill by capitalisation of average profit method = Average Profit × reverse rate of return
= 80,000 ×
= 8,00,000
Points to Remember in this chapter:-
 There are three methods are followed for valuing goodwill:-
1.) Average Profit Method
2.) Super Profit Method
3.) Capitalisation Method

23
 Methods of Valuation of Goodwill:-

I.) Average Profit Method:-
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1.) Simple Average Profit Method:- Average Profit × Number of Year’s Purchase


2.) Weighted Average Profit Method:- Weighted Average Profit × Number of Year’s Purchase
II.) Super Profit Method:- Super Profit × Number of year’s Purchase
III.) Capitalisation Method:-

1.) Capitalisation of Average Normal Profit:- Capitalised Value – Net Assets
2.) Capitalisation of Super Profit:- Super Profit × 100
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premium not paid was Rs 15,000.

Calculate the value of goodwill.

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Normal Profit for year 2015

Normal Profit for year 2016

Normal Profit for year 2017

Normal Profit for year 2017

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Goodwill under Weighted Average Profit Method

= Weighted Average Profit per Year × Years Purchase

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Goodwill under weighted Average Profit Method

Goodwill under weighted Average profit method

= Weighted Average profit per year × Years Purchase

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Goodwill under weighted Average Profit Method

Statements showing adjustment :

First Year 1,01,000 -24,000 77,000

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Goodwill under Super Profit Method = Super Profit × Years Purchase

Goodwill under Super Profit Method = Super Profit × Years Purchase

Average Profit per Year =

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Goodwill under Super Profit Method = Super Profit × Years Purchase

Goodwill under Super Profit Method = Super Profit × Years Purchase

Average Profit per Year =

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partners during this period is estimated to be Rs 1,00,000 p.a.

Goodwill under Super Profit Method = Super Profit × Years Purchase

=(Average Profit – Partner’s Commission – Normal Profit) × Years Purchase

=(2,00,000 – 1,00,000 – 4,00,000 × 15%) × 2 Years

=(2,00,000 – 1,00,000 – 60,000) × 2 Years

Average Profit per Year =

Goodwill under Super Profit Method = Super Profit × Year’s Purchase

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Goodwill under Super Profit Method = Super Profit × Year’s Purchase

= (Average Profit – Normal Profit) × Year’s Purchase

= (Average Profit – Capital Employed) × % of Normal Rate of Return)×Years Purchase

= (48,000 – 2,00,000 × 15%)×2 years Purchase

= (48,000 – 30,000) × 2 Years

Average Profit per year =

Goodwill under Super Profit Method = Super Profit × Years Purchase

=(Average Maintainable Profit – Normal Profit) × Years Purchase

=(40,000 – 1,50,000 × 15%) × 4 years Purchase

=(40,000 – 22,500) × 4 years

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Goodwill Under Super Profit Method

or Goodwill = Super Profit × Year’s Purchase

or Goodwill = (Average Profit – Normal Profit)×Years Purchase

or 24,000 = (Average Profit – 14,000) × 4 Years Purchase

or ( ) = Average Profit – 14,000

or 6,000 = Average Profit – 14,000

or Average Profit = 14,000 + 6,000

or Average Profit = 20,000

Capital Employed = Assets – Creditors = 75,000 – 5,000 = 70,000

= Capital + Reserve Fund = 60,000 + 10,000 = 70,000

Normal Rate of Return = 20%

Normal Profit = 70,000 × 20% = 14,000