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Accountancy 3 Marks Question

Goodwill- Nature and Valuation · CBSE STD 12 Commerce (CBSE - English Medium). 22 questions.

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Question 13 Marks
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 Profit × Number of Years' purchase$\text{Average profit}=\frac{\text{Total Profit}}{\text{Number of Years}}$
$=\frac{4,00,000+3,98,000+4,50,000+4,45,000+5,00,000}{5}$
$=\frac{21,93,000}{5}=₹\ 4,38,600$
Goodwill = 4,38,600 × 4 = ₹ 17,54,400
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Question 23 Marks
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
Goodwill = Capitalised Value of Profit - Actual Capital
Capitalised Value of Profit $=\frac{\text{Profit}\ \times\ 100}{\text{Normal Rate of Return}}$
$=\frac{2,00,000\ \times\ 100}{100}$
= ₹ 20,00,000
Total Capital = ₹ 16,00,000
$\therefore$ Goodwill = 20,00,000 - 16,00,000
= ₹ 4,00,000
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Question 33 Marks
Goodwill of the firm is valud at ₹ 5,00,000 at 2 year' purchase of average profit determine the missing value.
Total profit = ₹ 2,50,000 + ... + ₹ 3,00,000 - ₹ 1,00,000 + ₹ 3,50,000 = ₹ ...
$\text{Average profit}=\frac{\text{Total profits}}{\text{Number of years}}=\frac{₹\ ...}{5}=₹\ ...$
$\text{Goodwill}=₹\ ...\times=₹\ 5,00,000$
Answer
Total profit = ₹ 2,50,000 + 4,50,000 + ₹ 3,00,000 - ₹ 1,00,000 + ₹ 3,50,000
= ₹ 12,50,000 (Step 3)
$\text{Average profit}=\frac{​​​​​​​​₹\ 12,50,000}{5}=₹\ 2,50,000\ (\text{Step 2})$
Goodwill = ₹ 2,50,000 × 2 = ₹ 5,00,000 (Step 1).
Note: Total profit = Average profit × 5 = ₹ 12,50,000
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Question 43 Marks
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:
2015 – ₹ 12,000; 2016 – ₹ 18,000; 2017 – ₹ 16,000; 2018 – ₹ 14,000.
Calculate amount of Goodwill.
Answer
Goodwill = Average Profit × Number of years' purchase
$\text{Average Profit}=\frac{\text{Total Profit for past given year}}{\text{Number of Year}}$
$=\frac{12,000+18,000+16,000+14,000}{4}=\frac{60,000}{4}$
$=₹\ 15,000$
Number of years’ purchase = 3
$\therefore$ Goodwill = 15,000 × 3 = ₹ 45,000
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Question 53 Marks
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
Goodwill = Super Profit × Number of Years' purchase Normal Profit = Capital Investment × $\frac{\text{Normal Rate of Return}}{100}$
$=2,00,000\times\frac{15}{100}=₹\ 30,000$

Average Actual Profit after salary to Partners $=\frac{36,000+48,000+60,000}{3}=\frac{1,44,000}{3}$
= 48,000
Super Profit = Average Actual Profit after salaries - Normal Profit
= 48,000 - 30,000
= 18,000
Number of Years' Purchase : 2
$\therefore$ Goodwill = 18,000 × 2 = ₹ 36,000
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Question 63 Marks
A and B are equal partners. They decide to admit C for $\frac{1}{3}\text{rd}$ 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
Goodwill = Super Profit × Number of Years' purchase Normal Profit = Capital Employed × $\frac{\text{Normal Rate of Return}}{100}$
$=1,50,000\times\frac{15}{100}=₹\ 22,500$
Super Profit = Average Maintainable Profit - Normal Profit
= 40,000 - 22,500 = ₹ 17,500
Number of Years' Purchase = 4
$\therefore$ Goodwill = 17,500 × 4 = ₹ 70,000
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Question 73 Marks
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 Profit - Actual Capital Employed
Capitalised Value of Average Profit $=\text{Average Profit}\times\frac{100}{\text{Nominal Rate of Return}}$
$=1,00,00\times\frac{100}{10}=10,00,000$
Actual Capital Employed = 10,00,000 - 1,80,000 = 8,20,000
Goodwill = 10,00,000 - 8,20,000 = ₹ 1,80,000
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Question 83 Marks
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 $\frac{1}{4}\text{th}$ 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
Find the value of goodwill.
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
Average Profit of Five Year $=\frac{70,000}{5}=₹\ 14,100$
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 Years = $\frac{56,500}{4}=₹\ 14,125$
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.
$\therefore$ Goodwill = Average Profit × Number of Years' purchase
= 14,125 × 4 = ₹ 56,500
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Question 93 Marks
Form the following particulars, calculate value of goodwill of a firm by applying Capitalisation of Average Profit Method:
  1. 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.
  2. Capitalisation rate 20%.
  3. Net assets of the firm ₹ 2,00,000.
Answer
Goodwill = Capitalised Value of Average Profit - Net Assets (Capital Employed)
Average Profit $=\frac{54,000+42,000+39,000+67,000+59,000}{5}$
$=\frac{2,61,000}{5}=₹\ 52,200$
Capitalised Value of Average Profit = Average Profit $\times\frac{100}{\text{Normal Rate of Return}}$
$=52,200\times\frac{100}{20}=₹\ 2,61,000$
$\therefore$ Goodwill = 2,61,000 - 2,00,000
= ₹ 61,000
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Question 103 Marks
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
Average Profit = Normal Profit × Super ProfitCapital Employed = Total Assets - Creditors
= 75,000 - 5,000 = ₹ 70,000
Normal Profit $=\text{Capital Employed}\times\frac{\text{Normal Rate of Return}}{100}$
$=70,000\times\frac{20}{100}=₹\ 14,000$
Goodwill of the firm = ₹ 24,000
Number of years’ purchase = 4
Goodwill = Super Profit - Number of Years' Purchase
Or, 24,000 = Super Profit × 4
Or, Super Profit $=\frac{24,000}{4}$
= ₹ 6,000
$\therefore$ Average Profit = Normal Profit + Super Profit
= 14,000 + 6,000 = ₹ 20,000
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Question 113 Marks
The 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 in 10%. Remuneration of the partners is estimated to be ₹ 6,000 p.a. Find out the value of goodwill on the basis of two years' purchase of super profit.
Answer
Goodwill = Super Profit × Number of years' purchase
Normal Profits $=\text{Expected Capital Employed}\times\frac{\text{Normal Rate of Return}}{100}$
$=2,00,000\times\frac{10}{100}=₹\ 20,000$
Actual Expected Profit = 36,000 - 6,000 = ₹ 30,000
Super Profit = Actual Expected Profit - Normal Expected Profit
= 30,000 - 20,000 = ₹ 10,000
Number of years’ purchase = 2
$\therefore$ Goodwill = 10,000 × 2
= ₹ 20,000
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Question 123 Marks
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. Value the goodwill.
Answer
Goodwill = Super Profit × Number of years' purchase
Normal Profit $=\text{Capital Employed}\times\frac{\text{Normal Rate Return}}{100}$
$=50,000\times\frac{15}{100}=₹\ 7,500$
Actual Profit = ₹ 16,000
Super Profit = Actual Profit - Normal Profit
= 16,000 - 7,500 = ₹ 8,500
Number of years’ purchase = 4
$\therefore$ Goodwill = 8,500 × 4
= ₹ 34,000
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Question 133 Marks
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
Goodwill = Average Profit × Number of Years' purchase$\text{Average profit}=\frac{8,00,000+15,00,000+18,00,000-4,00,000+13,00,000}{5}$
$=\frac{50,00000}{5}=₹\ 10,00,000$
Number of years’ purchase = 3
Goodwill = 10,00,000 × 3 = ₹ 30,00,000
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Question 143 Marks
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 rate 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 = ₹ 1,00,000
Undervaluation of stock = ₹ 40,000
Average Actual Profit = Average Profit earned by a firm + Undervaluation of Stock
Or, Average Actual Profit = 1,00,000 + 40,000 = ₹ 1,40,000
$\text{Normal Profit}=\text{Capital Investment}\times\frac{\text{Normal Rate of Return}}{100}$
Or, Normal Profit $=6,30,000\times\frac{5}{100}=₹\ 31,500$
Super Profit = Actual Average Profit – Normal Profit
Or, Super Profit = 1,40,000 – 31,500 = ₹ 1,08,500
Goodwill = Super Profit × Number of Times
Goodwill = 1,08,500 × 5 = ₹ 5,42 500
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Question 153 Marks
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
Goodwill = Super Profit × Number of years' purchase Normal Profit $=\text{Capital Investment}\times\frac{\text{Normal Rate of Return}}{100}$ $=4,00,000\times\frac{15}{100}=₹\ 60,000$ Average Actual Profit after Remuneration $=\frac{70,000+1,00,000+130,000}{3}=\frac{3,00,000}{3}$= ₹ 1,00,000
Super Profit = Average Actual Profit after Remumeration - Normal Profit
= 1,00,000 - 60,000 = ₹ 40,000
Number of years’ purchase = 2 $\therefore$ Goodwill = 40,000 × 2 = ₹ 80,000
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Question 163 Marks
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
$\text{Goodwill}=\text{Super Profit}\times\frac{100}{\text{Nominal Rate of Return}}$
Super Profit = Average Profit - Normal Profit
Average Profit = 1,50,000(Given)
Normal Profit = Capital Employed × Normal Rate of Return
Normal Profit = (3,00,000 + 2,00,000) × 20% = 1,00,000
Super Profit = 1,50,000 - 1,00,000 = 50,000
$\text{Goodwill}=50,000\times\frac{100}{20} =₹\ 2,50,000$
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Question 173 Marks
The 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 ₹ 4,20,000 and the normal rate 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 = ₹ 7,50,000
Overvaluation of stock = ₹ 30,000
Average Actual Profit = Average Profit earned by a firm + Overervaluation of Stock
Or, Average Actual Profit = 7,50,000 - 30,000 = ₹ 7,20,000
Normal Profit $=\text{Capital Investment}\times\frac{\text{Normal Rate of Return}}{100}$
Or, Normal Profit $=42,00,000\times\frac{15}{100}=₹\ 6,30,000$
Super Profit = Actual Average Profit – Normal Profit
or, Super Profit = 7,20,000 – 6,30,000 = ₹ 90,000
Goodwill = Super Profit × Number of Times
Goodwill = 90,000 × 3 = ₹ 2,70,000
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Question 183 Marks
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
Goodwill = Average Profit × No.of years' purchase= 2,00,000 × 1.5 = ₹ 3,00,000
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 × 2)
$3^{rd}$ Year
3,00,000 (2,00,000 × 1.5)
Total Profit
6,00,000
WN: 2 Calculation of Average Profit
$\text{Average Profit}=\frac{\text{Total Profit for past given years}}{\text{Number of Years}}$
$=\frac{6,00,000}{3}=₹\ 2,00,000$
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Question 193 Marks
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 × Number of years' purchase
Super Profits = Average Profit - Normal Profit
Average Profits = $\frac{\text{Total Profits}}{\text{Normal of Years}}$
$=\frac{30,000+36,000+42,000}{3}=₹\ 36,000$
Normal Profit = Capital Employed × Normal Rate of Return
$=1,00,000\times\frac{15}{100}=15,000$
Super Profit = 36,000 - 15,000 = 21,000
Goodwill = 21,000 × 2 = ₹ 42,000
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Question 203 Marks
A partnership firm earned net profits during the last three years ended 31st March, as follows: 2016–₹ 17,000; 2017–₹ 20,000; 2018–₹ 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
Goodwill = Super Profit × Number of years' purchase
Average Actual Profits $=\frac{17,000+20,000+23,000}{3}=\frac{60,000}{3}$
= ₹ 20,000
Normal Profit $= \text{Capital Employed}\times\frac{\text{Fair Rate of Retern}}{100}$
$=80,000\times\frac{15}{100}=₹\ 12,000$
Super Profit = Average Actual Profit - Normal Profit
= 20,000 - 12,000 = ₹ 8,000
Number of years’ purchase = 2
$\therefore$ Goodwill = 8,000 × 2
= ₹ 16,000
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Question 213 Marks
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
Average Profit = ₹ 8,00,000
Normal Profit $=\text{Capital Employed}\times\frac{\text{Normal Rate}}{100}$
$=16,40,000\times\frac{10}{100}=₹\ 1,64,000$
Capital Employed = Total Assets - Outside Liabilities
= 22,00,000 - 5,60,000
= ₹ 16,40,000
Super Profit = Average Profit - Normal Profit
= 8,00,000 - 1,64,000
= ₹ ,636,000
Goodwill = Super Profit × No. of Years' purchase
= 6,36,000 × 2.5
= ₹ 15,90,000
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Question 223 Marks
The goodwill of a firm is valued at ₹ 1,35,000 at 3 year's purchase of supar profit. determine the missing values:
Avarage profit $=\frac{₹\ 3,60,000}{3}=₹\ 1,20,000$
Nomal profit $=₹\ ...\times\frac{15}{100}=₹\ ...$
Supar profit = Average profit - Normal profit
= ₹ 1,20,000 - ₹ ... = ₹ ...
Goodwill = supar profit × No. of years' purchase.
Answer
Average profit $=\frac{₹\ 3,50,000}{3}=1,20,000$
₹ 75,000 (Normal profit) $= ₹ ... (\text{capital Employed})\times\frac{15}{100 }$
Capital Employed $= ₹\ 75,000\times\frac{100}{15}=₹\ 5,00,000$ (Stap 3)
Goodwill = super profit × No. of years' purchase.
₹ 1,35,000 = Super profit × 3
$\text{Super profit}=\frac{₹\ 1,35,000}{3}=₹\ 45,000$ (Step 2)
Normal profit = Average profit × super profit
= ₹ 1,20,000 - ₹ 45,000 = ₹ 75,000 (Step 3)
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