50 AICIAN CONCEPT BOOK

SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE PARTNERSHIP

Chapter 2
Accounting For Partnership : Goodwill

Meaning and Definitions of Goodwill

Goodwill is the good name or reputation of a business which helps it to earn
more profits than others.
Goodwill is earned by a firm through the hardwork and honesty of its owners.
The term goodwill is generally used to denote the benefit arising from
connections and reputations. Lord Lindley
Nature of Goodwill
Goodwill is an intangible asset (an asset which cannot be seen and touched) and not a fictitious asset, because it has
a realisable value and fictitious assets don’t have a realisable value. Goodwill can be sold, but sale of goodwill is
possible only along with the sale of business.
Essential Features or Characteristics of Goodwill Need for Valuation of Goodwill
(i) It is an intangible and valuable asset. i. At the time of change in profit sharing ratio
(ii) It helps in earning excess profits. amongst the existing partners.
(iii) Its value is liable to constant fluctuation. ii. At the time of admission of a new partner.
(iv) It is valuable only when entire business is sold. iii. At the time of retirement or death of a partner.
(v) It is difficult to place an exact value of goodwill. iv. When the partnership firm is sold (Dissolution).
Factors Affecting the Value of Goodwill v. Amalgamation of partnership firm.
Goodwill is directly related to profits. A firm earning Classification of Goodwill
profits higher than others will certainly have goodwill in Goodwill can be classified into two categories
the market. So, to decide whether a factor affects goodwill 1. PURCHASED GOODWILL
or not, we will have to see whether, it affects the profits. If It is the goodwill that is acquired by a business after
it affects the profit, then it will also affect goodwill. paying consideration in cash or in kind. As per
Factors affecting goodwill are :
Accounting Standard-26, it is recorded in the books of
i. Nature of Business : If the nature of the products,
accounts because consideration in money or money’s
in which the firm deals, are in high demand, the
worth is paid for it.
profit of the firm will be higher and therefore the
2. SELF-GENERATED GOODWILL
value of goodwill will increase.
It is the internally generated or hard earned goodwill
ii. Efficiency of Management : If the management
which arises due to continued hard work of the
is capable and competent, the firm will earn high
organisation, its better quality products, better customer
profits. It will thus, increase the value of goodwill.
service, etc. As per Accounting Standard-26, it is not
iii. Location: If the business is located at a favourable
recorded in the books because no consideration in money
place, it will result in good sales and also increase
or money’s worth is paid for it.
in the value of goodwill.
iv. Market Situation: If a firm deals in a business Methods of Valuation of Goodwill
where the demand for the products is higher than Since goodwill is an intangible asset, it is very difficult to
the supply, it will lead to lower capital requirement accurately calculate its value. Various methods are
and higher profit. It will thus, increase the value of available for the valuation of goodwill of a partnership
goodwill. firm. Goodwill calculated by one method may differ from
v. Special Advantages: Firms enjoying special the goodwill calculated by another method.
advantages (like import licenses, favourable and The important methods of valuation of goodwill are as follows
long-term contracts for supply of materials, low i. Average Profit Method
rate and assured supply of electricity, patents, etc.) ii. Super Profit Method
enjoy higher value of goodwill. iii. Capitalisation Method
51 AICIAN CONCEPT BOOK

SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE PARTNERSHIP

1. AVERAGE PROFIT METHOD
Goodwill under average profit method can be calculated using simple average profit method or weighted average profit
method.
Average profit method involves two approaches:
(i) Simple average profit method
(ii) Weighted average profit method
(i) Simple Average Profit Method
Under this method, goodwill is ascertained by multiplying the average profits by a certain number of years’
purchase.
Average Profit - It is the total profit divided by the total number of years for which profit and loss is given.
Number of Years’ Purchase - It refers to specific number of years for which the business will earn same amount of
profits because of its past efforts.
This method is based on the assumption that a new business will not be able to earn profits during the initial years as
compared to an established business. Hence, goodwill is the compensation for the same based on previous performance
of the business.
Steps to be followed for calculating goodwill are:
Step 1 Find actual (adjusted) profits of each given year by deducting abnormal gains and non-business incomes and
adding abnormal losses and non-business expenses.
Step 2 Calculate the total normal profits by adding each year's profit.
Step 3 Find average profit
Total actual (adjusted) profits
of given number of years
Given number of years
Step 4 Find value of goodwill
= Average profit x Number of years' purchase

Example |1|
Compute the value of goodwill on the basis of four years’
purchase of the average profits based on the last five years. The
profits for the last five years were as follows :
Year Amount (₹)
2013 40,000
2014 50,000
2015 60,000
2016 50,000
2017 60,000
52 AICIAN CONCEPT BOOK

SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE PARTNERSHIP

Example |2|
The profits and losses for the last five years were:
Year Amount (₹)

1st year 6,000 (including an abnormal gain of 2,000)

2nd year 14,000 (excluding 4,000 as insurance premium)

3rd year 4,000 (after charging an abnormal loss of 2,000)

4th year 6,000

5th year 2,000 (loss)

Calculate the amount of goodwill on the basis of 3 years’

purchase of last 5 years profits and losses.

Example |3|
L, M, and N are partners sharing profits and losses equally.
They agree to admit D for equal share. For this purpose, value
of goodwill is to be calculated on the basis of four years’
purchase of average profit of last five years. These profits
were:
Year Amount (₹)
2013 60,000
2014 1,40,000
2015 2,00,000
2016 2,80,000
2017 2,40,000(Loss)

On 1st January, 2015, a moped costing ₹ 40,000 was

purchased and debited to travelling expenses account, on
which depreciation is to be charged @ 25%. Calculate the
value of goodwill after adjusting the above.

Example |4| (Evaluation question) Goodwill of the firm is

valued at ₹2,50,000 at 2 years' purchase of
average profit. Determine the missing value.
Total profits = ₹1,25,000+.......+₹1,50,000 - ₹50,000 +
₹1,75,000 = ₹...........

Average profit = Total profits = ₹... = ₹.......

Number of years 5

Goodwill = ₹............. x 2 = ₹2,50,000.

53 AICIAN CONCEPT BOOK

SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE PARTNERSHIP

2. WEIGHTED AVERAGE PROFIT METHOD
Under this method, goodwill is calculated by multiplying the weighted average profit with the number of years’ purchase.
In this method, each year’s profit is multiplied by the number of assigned weights, e.g. (1, 2, 3, 4 etc) and the value is
ascertained. The products are added and divided by the total of weights to arrive at the weighted average profit. This
method is particularly effective when the profit shows a rising or falling trend.
Steps to be followed for calculating goodwill are:
Step 1 Calculate weighted average profit as follows

Total of products
Weighted average profit =
Total of weights

Step 2 Value of goodwill = Weighted average profit x

Number of years' purchase
Example |5| The profits of a firm for the year ended 31st March
for the last five years were:
Year Amount (₹)
2013 80,000
2014 96,000
2015 1,20,000
2016 1,00,000
2017 72,000
Calculate the value of goodwill on the basis of three years’
purchase of the weighted average profit after assigning weights
1, 2, 3, 4 and 5 respectively to the profits for 2013, 2014, 2015,
2016 and 2017.
Example |6| The profits of a firm for the year ended 31st March
for the last four years were: 2014 ₹ 1,01,000; 2015
₹ 1,24,000; 2016 ₹ 1,00,000 and 2017 ₹ 1,50,000.
Calculate the value of goodwill of the firm on the
basis of 3 years of the weighted average profits
after assigning weights 1, 2, 3, 4.
Additional Information
i. A major plant repair was undertaken on 1st sep 2016 for ₹
30,000, which was charged to revenue. The said sum is to be
capitalised for goodwill calculation subject to adjustment of
depreciation of 10% p.a on reducing balance method.
ii. Closing stock for the year 2015 was overvalued by ₹ 12,000.
iii. To cover management cost an annual charge of ₹ 24,000
should be made for the purpose of valuation of goodwill.
54 AICIAN CONCEPT BOOK

SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE PARTNERSHIP

2. SUPER PROFIT METHOD
In any business, a certain amount or percentage of profits is Capital employed (net assets)
normally expected. But in practice we may earn more than = All assets (other than goodwill, fictitious
that normal profit or we may earn less than that normal assets and non-trade investments) at their
profit. current values - Outsiders liabilities
Excess of actual profits over the normal profits is called or
Total Partner's Capital + Reserves and surplus
super profits. In this method, goodwill is calculated by
(Excluding goodwill, fictitious assets and non-
multiplying super profit by a certain number of years given.
trade investments)
If super profit is negative or zero, it means that actual
average profit is equal to or less than normal profit. In that or, Average capital employed
case goodwill of the firm would be zero or nil because Opening capital employed
goodwill cannot be negative. = +Closing capital employed
Steps to be followed for calculating goodwill by this method are: 2
Step 3 Find super profits = Average (actual) profits
Step 1 Find average profits. - Normal profits
Step 2 Find normal profits.
Step 4 Value of goodwill = Super profits
Normal profits = Average capital employed
× Number of years' purchase
X Normal rate of return
100
Difference between average profit and super profit
Basis Average Profit Super Profit
Meaning It is average of the profits of past few -years. It is the excess of average profits over normal
profit.
Normal rate of return Normal rate of return is not relevant in the Normal rate of return is considered while
calculation of average profit. calculating the super profit
Average capital employed Average capital employed is not considered Average capital employed is taken into
while calculating average profit account while calculating the super profit.
Relevance of valuing Average profit is relevant for average profit Super profit is relevant for super profit
goodwill method, super profit method and method and capitalisation of super profit
capitalisation method of valuation of method of valuation of goodwill.
goodwill.

Example |7| A firm earned net profits during the last three
years as :
Year Amount (₹)
I 36,000
II 40,000
III 44,000
The capital investment of the firm is ₹1,20,000. A fair return
on the capital having regard to the risk involved is 10%.
Calculate value of goodwill on the basis of three years'
purchase of the average super profit for the last three years.
55 AICIAN CONCEPT BOOK

SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE PARTNERSHIP

Example |8| Capital employed in a business is ₹ 2,00,000. The

normal rate of return on capital employed is 15%. During the
year 2017, the firm earned a profit of ₹ 48,000. Calculate
goodwill on the basis of 3 years’ purchase of super profit.

Example |9| On 1st April, 2017, an existing firm had assets of ₹

7,500 including cash of ₹ 500. Its creditors amounted to ₹ 500
on that date. The partners’ capital account showed a balance of
₹ 6,000 and the reserve constituted the rest. If the normal rate
of return is 10% and the goodwill of the firm is valued at ₹
2,400 at four years’ purchase of super profit, find the average
profits per year of the existing firm.

Example |10| Average net profit of Varsha Ltd expected in the

future is ₹ 1,08,000 per year. The average capital employed in
the business is ₹ 6,00,000. Normal profit expected from capital
invested in this class of business is 10%. The remuneration of
the partners is estimated to be ₹ 18,000 per annum. Find out
the value of goodwill on the basis of two years’ purchase of
super profit.

Example |11| Average profits of a firm during the last few years
are ₹ 80,000 and the normal rate of return in a similar business
is 10%. If the goodwill of the firm is ₹ 1,00,000 at 4 years’
purchase of super profit, find the capital employed by the firm.

3. CAPITALISATION METHOD
Under this method, goodwill can be calculated in two ways: Total actual profits of given years before
(i) Capitalisation of Average Profit abnormal and non-business items
(ii) Capitalisation of Super Profit Numbers of years
Step 2 Calculate capitalised value of average profits
(i) Capitalisation of Average Profit
100
In this method, goodwill of the firm is calculated by Average profits X
Normal rate of return
deducting capital employed (net assets) in the business
Step 3 Determine the value of net assets, on the date of
from the capitalised value of average (actual) profits on
valuation of goodwill.
the basis of normal rate of return.
Capital employed (net assets)
All assets (other than goodwill, fictitious
Capitalised value of the business is ascertained by
assets and non-trade investments) at their
capitalising profits earned at the normal rate of profit.
current values - Outsiders liabilities
Steps to be followed in this method are :
Step 4 Find value of goodwill
Step 1 Calculate average (actual) profits Capitalised value of profits
- Actual capital employed
56 AICIAN CONCEPT BOOK

SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE PARTNERSHIP

Example |12| A firm earns ₹ 1,20,000 as its annual profit, the
normal rate of profit being 10%. Assets of the firm are ₹
14,40,000 (excluding goodwill) and liabilities are ₹ 4,80,000.
Find the value of goodwill by capitalisation method.

(ii) Capitalisation of Super Profit

In this method, goodwill is calculated by the capitalisation
of super profits on the basis of normal rate of return.
Steps to be followed in this method are :
Step 1 Calculate capital employed (net assets) of the firm
= All assets (other than goodwill, fictitious assets Example |14| A business has earned average profits of ₹
and non-trade investments) at their current 1,00,000 during the last few years and the normal rate of
values - Outsiders liabilities return in similar business is 10%. Find out the value of
or goodwill by
Total Partner's Capital + Reserves and surplus
(i) Capitalisation of super profit method.
(Excluding goodwill, fictitious assets and non-
(ii) Super profit method if the goodwill is valued at 3 years’
trade investments)
purchase of super profit.
Step 2 Calculate normal profits on capital employed The assets of the business were ₹ 10,00,000 and its
= Capital employed X Normal rate of return external liabilities ₹ 1,80,000.
100

Step 3 Calculate average profits of past years.

Step 4 Calculate super profits

= Average profits - Normal profits

Step 5 Calculate goodwill

100
=Average profits X
Normal rate of return

Note - Students should note that answer from both the

capitalisation methods ,i.e, capitalisation of average
profits and capitalisation of super profits, will be same.

EXAMPLE |13| Average profit of the firm is ₹3,00,000.

Total tangible assets in the firm are ₹28,00,000 and
outside liabilities are ₹8,00,000. In the same type of
business, the normal rate of return is 10% of the capital
employed. Calculate value of goodwill by capitalisation of
super profit method.
57 AICIAN CONCEPT BOOK
SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE
EXAMPLE [15] A partnership firm earned net profits
during the last three years as follows :
The capital employed 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 all the partners during
this period is estimated to be ₹ 1,00,000 per annum.
Calculate the value of goodwill on the basis of
(i) Two years' purchase of super profits earned on average
basis during the above mentioned three years.
(ii) By capitalisation method.
Practice Questions
1 Ashu purchased Balu’s business with effect from 1st
January, 2018. It was agreed that the firm’s goodwill is to
be valued at two years’ purchase of normal average profit
of the last three years. The profits of Balu’s business for
the last three years were
2015 — ₹ 80,000 (including an abnormal gain of ₹
10,000). 2016 — ₹ 1,00,000 (after charging an abnormal
loss of ₹ 20,000).
2017 — ₹ 90,000 (excluding ₹ 10,000 as insurance
premium on firm’s property-now to be insured).
Calculate value of the firm’s goodwill.
PARTNERSHIP
2 Profits of a firm for the year ended 31st March for the last five
years were :
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 2014, 2015, 2016, 2017 and 2018.
3 A firm earned net profits during the last three years as :
The capital investment of the firm is ₹ 30,000. A fair return on
the capital having regard to the risk involved is 10%. Calculate
value of goodwill on the basis of three years’ purchase of the
average super profit for the last three years.
4 On 1st April, 2017, an existing firm had assets of ₹ 1,50,000
including cash of ₹ 10,000. Its creditors amounted to ₹ 10,000
on that date. The firm had a reserve of ₹ 20,000 while partners’
capital accounts showed a balance of ₹ 1,20,000. If normal rate
of return is 20% and goodwill of the firm is valued at ₹ 48,000
at four years’ purchase of super profit, find average profit per
year of the existing firm.
5 A business earned an average profit of ₹ 8,00,000 during the
last few years. The normal rate of profits 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 1 2 years’ purchase of super profits.
6 A partnership firm earned net profits during the past three
years as follows :
Capital investment in the firm throughout the above mentioned
period has been ₹ 8,00,000. 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 ₹ 2,00,000 per annum.
Calculate value of goodwill on the basis of two years’ purchase
of average super profit earned during the above mentioned
three years.
58 AICIAN CONCEPT BOOK
SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE
7 From the following particulars, calculate value of
goodwill of a firm by applying capitalisation of average
profit method.
(i) Profits of last five consecutive years are:
2018—₹ 1,08,000
2017—₹ 84,000
2016—₹ 78,000
2015—₹ 1,34,000 and
2014—₹ 1,18,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm ₹ 4,00,000.
8 Average net profit expected in future by Anand and Co. is
₹ 60,000 per year. Average capital employed in the
business by the firm is ₹ 4,00,000.
Normal rate of return on capital employed in a similar
business is 10%. Calculate goodwill of the firm by
(i) Super profit method on the basis of two years’ purchase.
(ii) Capitalisation of super profit method.
9 J and K are partners in a firm. Their capitals are: J ₹
3,00,000 and K ₹ 2,00,000. During the year ended 31st
March, 2018, the firm earned a profit of ₹ 1,50,000.
Assuming that the normal rate of return is 20%, calculate
the value of goodwill of the firm by.
(i) Capitalisation method.
(ii) Super profit method if the goodwill is valued at 2 years’
purchase of super profit.
10 From the following information, calculate value of
goodwill of M/s Raj and Hans
(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.
11 Calculate value of goodwill on the basis of three years’
purchase of average profit of the preceding five years which
were as follows :
12 Profits of the last three years were 2015 — Profit ₹
1,00,000 (including profits on sale of assets ₹ 10,000).
2016 — Loss ₹ 40,000 (including loss by fire ₹ 60,000).
2017 — Profit ₹ 1,40,000 (including insurance claim
received ₹ 36,000 and interest on investments and dividend
received ₹ 16,000). Calculate value of goodwill at 2 years’
purchase of the average normal profit of past 3 years.
PARTNERSHIP
13 The average net profits expected in the future by NPT firm
are ₹ 72,000 per year. The average capital employed in the
business by the firm is ₹ 2,00,000. The rate of interest
expected from capital invested in this class of business is
10%. The remuneration of the partners is estimated to be ₹
6,000 per annum. Find out the value of goodwill on the basis
of two years’ purchase of super profit.
14 A partnership firm earned the following net profits during
the last three years.
2015 — ₹ 34,000,
2016 — ₹ 40,000,
2017 — ₹ 46,000
The capital investment in the firm throughout the above
mentioned period has been ₹ 1,60,000. 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.
15 A firm earns ₹ 6,00,000 as its annual profits, the rate of
return being 12%. Assets and liabilities of the firm amounted
to ₹ 72,00,000 and ₹ 24,00,000 respectively. Calculate value
of goodwill by capitalisation method.
16 A firm earns profit of ₹ 10,00,000. 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 ₹ 1,10,00,000 and ₹ 28,00,000
respectively. Calculate value of goodwill according to
capitalisation of super profit method as well as capitalisation
of average profit method.
17 XYZ Ltd has assets of ₹ 2 50 000 ,, whereas liabilities are:
Partners’ capitals – ₹ 1,75, 000, General reserve – ₹ 30,000
and Sundry creditors–₹ 45,000. If normal rate of return is
10% and goodwill of the firm is valued at ₹ 45,000 at 2
years’ purchase of super profit, find average profit of the firm.
18 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 ₹ 50,000, 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.
19 The goodwill of a firm is valued at ₹ 67,500 at 3 years'
purchase of super profit. Determine the missing values:
₹1,80,000
Average profit = = ₹60,000
3
Normal profit = ₹........... 15 =₹...........
100
Super profit = Average profit - Normal profit
= ₹60,000 - ₹...... = ₹......
Goodwill = Super profit X No. of years’ purchase
59 AICIAN CONCEPT BOOK

SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE PARTNERSHIP

OBJECTIVE TYPE Questions
Multiple Choice Questions
1 Nature of goodwill is
(a) intangible asset (b) fictitious asset
(c) long-term liability (d) current asset
2 Which of the following is/are method(s) of valuation of
goodwill?
(a) Average profit method (b) Super profit method
(c) Capitalisation method (d) All of the above
3 Which of the following factor(s) affect goodwill?
(a) Nature of business (b) Efficiency of management
(c) Location (d) All of the above
4 Find out those situations which create need for valuation
of goodwill for a partnership firm?
(a) When existing partners change their profit sharing
ratio
(b) When a new partner comes into partnership
(c) When an existing partner retires from partnership
(d) All of the above
5 Find out that goodwill which is accounted for, as per
Accounting Standard 26.
(a) Purchased goodwill only
(b) Self-generated goodwill only
(c) Both (a) and (b)
(d) Goodwill brought in by a partner
6 The profits for last 3 years were
1st year = ₹ 6,000 (including abnormal gain ₹ 2,000)
2nd year = ₹ 4,000 (after charging abnormal loss ₹ 3,000)
3rd year = ₹ 2,500 (including abnormal income ₹ 1,500)
Calculate goodwill on the basis of 3 years’ purchase of last
3 years profits and losses.
(a) ₹ 12,500 (b) ₹ 12,000 (c) ₹ 13,000 (d) ₹ 16,000
7 Capital employed in a business is ₹ 2,00,000. Normal
rate of return on capital employed is 15%. During the year,
the firm earned a profit of ₹ 48,000. Calculate goodwill on
the basis of 3 years’ purchase of super profit.
(a) ₹ 54,000 (b) ₹ 60,000
(c) ₹ 50,000 (d) None of these
8 A firm earns ₹ 1,20,000 as its annual profits. The normal
rate of profit being 10%. Assets of firm are ₹ 14,40,000
and liabilities are ₹ 4,40,000.
Find value of goodwill by capitalisation method.
(a) ₹ 4,00,000 (b) ₹2,80,000
(c) ₹ 2,00,000 (d) ₹3,60,000
9 Average profit of firm is ₹ 3,00,000. Total tangible assets in
the firm are ₹ 28,00,000 and outside liabilities are ₹
8,00,000. In same type of business, normal rate of return is
10% of capital employed. Calculate goodwill by
capitalisation of super profit method.
(a)₹ 14,00,000 (b)₹16,00,000 (c)₹ 18,00,000 (d)₹10,00,000
10 Amit and Sumit were partners in a firm with capitals of ₹
3,00,000 and ₹ 2,00,000 respectively. The normal rate of
return was 20% and the capitalised value of average profits
was ₹ 8,50,000. The goodwill of the firm by capitalisation of
average profit method will be .................
(a) ₹ 10,00,000 (b) ₹ 1,50,000 (c) ₹ 3,50,000 (d) ₹ 5,00,000
Fill in the Blanks
11 Goodwill = Capitalised value of average profit - ………….
12 ………… is the excess of actual average profit over the
normal profits.
13 ………… goodwill is not shown in the books of account. Ans
Self-generated
14 Under .............. method, goodwill is ascertained by
multiplying the average profits by a certain number of years’
purchase.
15 .............. = Total of products
Total of weights
State True or False
16 Goodwill is a fictitious asset.
17 Losses are ignored while calculating the average profit.
18 For valuation of goodwill, normal profit is calculated by
deducting abnormal gains and adding abnormal losses.
19 Average profit method involves two approaches.
20 Super profit is calculated by dividing total profit with total
number of years.
Match the Following
21 Write the correct pair.
VERY SHORT ANSWER Type Questions
1 Define goodwill.
Ans Goodwill is the good name or reputation of a business
which helps it to earn more profits than others.
2 Give two characteristics of goodwill
Ans (i) It is an intangible and valuable asset.
(ii) It helps in earning excess profits.
60 AICIAN CONCEPT BOOK
SUKHI BHAIYA ASPIRE INSTITUE OF COMMERCE
3 How does the factor ‘quality of product’ affect the goodwill
of a firm?
Ans If the firm enjoys good reputation for its product’s
quality, there will be higher sales and the value of its
goodwill will increase.
4 What is meant by number of years' purchase at the time of
valuation of goodwill?
Ans Number of years' purchase means for how many
specific years the business will earn same amount of profits
because of its past efforts.
5 What is meant by super profits?
Ans Super profit is the excess of actual average profits over
normal profits.
6 Enumerate two main steps involved in valuing the
goodwill according to super profits method.
Ans The two main steps involved in valuing the goodwill
according to super profits method are
(i) Ascertain super profits Super profits = Average (Actual)
profits - Normal profits
(ii) Calculate goodwill
Value of goodwill = Super profits x Number of years’
purchase 7 Give the formula for calculation of goodwill by
capitalisation of average profits.
Ans Goodwill = Capitalised value of profits - Actual capital
employed
8 Give the formula for calculation of goodwill by
capitalisation of super profits.
Ans Goodwill = Super profits x 100
Normal rate of return
9 How does nature of business affect the value of goodwill
of a firm?
Ans If the nature of the products, in which the firm deals, are
in high demand, the profit of the firm will be higher and
therefore the value of goodwill will increase.
PARTNERSHIP
SHORT ANSWERS Type Questions
10 State any three circumstances other than (i) death of a
partner , (ii) admission of a partner and (iii) retirement of a
partner, when need for valuation of goodwill of a firm may
arise.
Ans The need for valuation of goodwill may arise :
(i) When there is a change in profit sharing ratio In case the
existing partners in the firm decide to mutually change the
profit sharing ratio between them, there is a need to value
the goodwill.
(ii) When the partnership firm is sold as going concern The
need for valuation of goodwill arises, in case the
partnership firm is sold to some other concern on going
basis.
(iii) When two firms amalgamate The need for valuing also
arises in case of amalgamation of two firms that is merger
or acquisition of two business.
11 On what occassions does the need for valuation of
goodwill arise?
Ans The need for valuation of goodwill arises in the
following circumstances :
(i) When there is a change in profit sharing ratio.
(ii) When a new partner is admitted.
(iii) When a partner retires or dies.
(iv) When partnership firm is sold as a going concern.
(v) When two or more firms amalgamate.
12 What are the various factors affecting goodwill?
Ans Refer NOTES of this chapter.
13 Enumerate the methods of valuation of goodwill?
Ans Following are the methods of valuation of goodwill
(i) Average profit method :
(a) Simple average method
(b) Weighted average Method
(ii) Super profit method
(iii) Capitalisation method :
(a) Capitalisation of average profits
(b) Capitalisation of super profits