4 Marks Question

Question 14 Marks

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:

Capitalisation of Super Profit Method.
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 – ₹ 4,00,000
Normal Rate of Return – 10%

Goodwill by Capitalisation of Super profit

$\text{Goodwill}=\text{Super Profits}\times\frac{100}{\text{Normal Rate of Return}}$

Capital Employed = Assets - External Liabilities

= 40,00,000 - 7,20,000

= ₹ 32,80,000

Normal Profit $=\text{Capital Employed}\times\frac{\text{Normal Rate of Return}}{100}$

$=32,80,000\times\frac{10}{100}$

= ₹ 3,28,000

Super Profit = Actual Profit - Normal Profit

= 4,00,000 - 3,28,000

= ₹ 72,000

$\text{Goodwill}=72,000\times\frac{100}{10}$

= ₹ 7,20,000

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

Goodwill = Super Profit × Number of year's Purchase

= 72,000 × 3

= 2,16,000

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

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Question 24 Marks

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:

C will be given $\frac{2}{5}\text{th}$ share of the profit.
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 (profit) of ₹ 30,000 on the sale of fixed assets).
you are required to value the goodwill.

Answer

Goodwill = Normal Average Profit × Number of years' purchase

Normal Average Profit $=\frac{\text{Normal Profit for last 3 years}}{3}$
$=\frac{1,80,000}{3}=₹\ 60,000$
Number of years’ purchase is 2
$\therefore$ Goodwill = 60,000 × 2 = ₹ 1,20,000

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Question 34 Marks

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

Weighted Averag Profit $=\frac{\text{Total Product of Profits}}{\text{Total of weights}}$
$=\frac{3,48,000}{15}=₹\ 23,200$
Goodwill = weighted Average Profit × Number of years' purchase
$= 23,200 \times 3 = ₹\ 69,600$

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Question 44 Marks

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 of capital employed is 10%, calculate goodwill of the firm by:

Super Profit Method at three years' purchase.
Capitalisation of Super Profit Method.

Answer

Goodwill = Super Profit × No. of Years' Purchase

= 20,000 × 3 = ₹ 60,000

Goodwill $=\text{Super Profit}\times\frac{100}{\text{Normal Rate of Return}}$

$=20,000\times\frac{100}{10}=₹\ 2,00,000$
Working Notes:
WN1: Calculation of Super Profits
Average Profit $=\frac{\text{Total Profit for past given years}}{\text{No. of Years}}$
= ₹ 50,000
Normal Profit $=\text{Capital Employed}\times\frac{\text{Normal Rate of Return}}{100}$
$=3,00,000\times\frac{10}{100}=₹\ 30,000$
Super Profit = Average Profit - Normal Profit
= 50,000 - 30,000 = ₹ 20,000

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Question 54 Marks

Manbir and Nimrat are partners and they admit Anahat into partnership. It was agreed to value goodwill at three years' 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 2018. 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:

There was an abnormal loss of ₹ 20,000 in the year ended 31st March, 2014.
There was an abnormal gain (profit) of ₹ 30,000 in the year ended 31st March, 2015.
Closing Stock as on 31st March, 2017 was overvalued by ₹ 10,000.

Calculate the value of goodwill.

Answer

Goodwill = weighted Average Profit × No. of years' purchase = 1,39,000 × 3 = ₹ 4,17,000 Working Notes: WN: 1 Calculation of Normal Profits:

WN: 2 Calculations of Weighted Average Profits:

$\text{Weighted Average Profit}=\frac{\text{Total of Profit Product}}{\text{Total of Weights}}$ $=\frac{20,85,000}{15}=₹\ 1,39,000$

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Question 64 Marks

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

Calculation of Goodwill by Capitalisation of Super Profit Method:

Goodwill $=\text{Super Profit}\times\frac{100}{\text{Normal Rate of Return}}$

Capital Employed = Assets - External Liabilities

= 55,00,000 - 14,00,000 = ₹ 41,00,000

Normal Profit $= \text{Capital Employed}\times\frac{\text{Normal Rate of Return}}{100}$

$=41,00,000\times\frac{10}{100}=₹\ 4,10,000$

Profit of the firm = ₹ 5,00,000

Super Profit = Actual Profit - Normal Profit

= 5,00,000 - 4,10,000 = ₹ 90,000

$\therefore\text{Goodwill}=90,000\times\frac{100}{10}$

= ₹ 9,00,000

Calculation of Goodwill by Capitalisation of Average Profit Method:

Goodwill = Capitalised Value of Profit - Actual Capital Employed

Capitalised Value of Profit $=\text{Actual Profit}\times\frac{100}{\text{Normal Rate of Return}}$

$=5,00,000\times\frac{100}{10}$

= ₹ 50,00,000

Capital Employed = Assets - External liabilities

= 55,00,000 - 14,00,000 = 41,00,000

$\therefore$ Goodwill = 50,00,000 - 41,00,000

= ₹ 9,00,000

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Question 74 Marks

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 $\frac{1}{4}\text{th}$ 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; 2017-2018 ₹ 2,50,000 The remuneration of the partners is estimated to be ₹ 90,000 p.a. Calculate amount of goodwill.

Answer

Weighted Average Profit $=\frac{\text{Total Product of Profits}}{\text{Total of weights}}$
Weighted Average Profit $=\frac{8,70,000}{6}=₹\ 1,45,000$
Goodwill = weighted Average Profit × Number of years' purchase
$= 1,45,000 \times 2 = ₹\ 2,90,000$

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Question 84 Marks

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

Goodwill = Super Profit $\times\frac{100}{\text{Normal Rate of Return}}$
$=80,000\times\frac{100}{10}=₹\ 8,00,000$
Working Notes:
WN: 1 Calculation of Super Profits:
Average Profit $=\frac{\text{Total Profit for past given years}}{\text{Number of Years}}$
= 2,00,000
Normal Profit $=\text{Capital Employed}\times\frac{\text{Normal Rate of Return}}{100}$
$=12,00,000\times\frac{10}{100}=₹\ 1,20,000$
Super Profit = Average Profit - Normal Profit
= 2,00,000 - 1,20,000 = ₹ 80,000
WN: 2 Calculation of Capital Employed:
Capital Employed = Total Assets - Outside Liabilities
= 15,00,000 - 3,00,000 = ₹ 12,00,000

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Question 94 Marks

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

Goodwill = Super Profit × No, of Years' Purchase = 48,000 × 3 = ₹ 1,44,000 Working Notes: WN: 1 Calculation of Normal Profits:

WN: 2 Calculation of Super Profits:
Average Profit $=\frac{\text{Total Profit of past given years}}{\text{Number of Years}}$ $=\frac{9,90,000}{5}=₹\ 1,98,000$ Normal Profit = Capital Employed $\times\frac{\text{Normal Rate of Return}}{100}$ $=15,00,000\times\frac{10}{100}=₹\ 1,50,000$ Super Profit = Average Profit − Normal Profit = 1,98,000 - 1,50,000 = ₹ 48,000 WN: 3 Calculation of Capital Employed Capital Employed = Total Assets - Outside Liabilities = 20,00,000 - 5,00,000 = ₹ 15,00,000

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Question 104 Marks

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

Goodwill = Normal Average Profit × Number of years' purchase

Normal Average Profit $=\frac{\text{Normal Profit for last 3 years}}{3}$
$=\frac{99,000}{3}=₹\ 33,000$
Number of years’ purchase = 2
$\therefore$ Goodwill = 33,000 × 2 = ₹ 66,000
Z's share of Goodwill = Goodwill of the firm × Z's share of Profit
$=66,000\times\frac{1}{4}=₹\ 16,500$

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