Advertisement Remove all ads

​Calculate the Value of Goodwill. - Accountancy

Sum

​ Varuna and Karuna are partners for equal shares. They admit Lata into partnership for 1/4th share. It was agreed to value goodwill of the firm at 4 years' purchase of super profit. Normal rate of return is 15% of the capital employed. Average profit of the firm is ₹ 4,00,000. Balance Sheet of the firm as at 31st March, 2019 was as follows:

Liabilities

Amount
(₹)
Assets Amount
​(₹)
Capital A/cs:     Furniture 4,00,000
Varuna 5,00,000   Computers 3,00,000
Karuna 5,00,000 10,00,000 Electrical Fittings 1,00,000
Long-term Loan 5,50,000 Investments (Trade) 2,00,000
Sundry Creditors 2,00,000 Stock 3,00,000
Outstanding Expenses 50,000 Sundry Debtors 3,00,000
Advances from Customers 1,50,000 Bills Receivable 50,000
    Cash in Hand 50,000
    Cash at Bank 2,00,000
    Deferred Revenue Expenditure:  
    Advertisement Suspense 50,000
  19,50,000    19,50,000 

​Calculate the value of goodwill.

Advertisement Remove all ads

Solution

Average Profit = Rs. 4,00,000

Capital Employed = Total Assets - (Non - Trade Investment) - Outside Liabilities 
= Rs. ( 19,50,000 - 50,000 - 4,00,000) = Rs. 15,00,000.

Normal Profits = `("Capital Employed" xx "Normal Rate of Return"/100)`

= Rs. `( 15,00,000 xx 15/100 )` = Rs. 2,25,000.

Super Profits = Average Profits - Normal Profits

= Rs. ( 4,00,000 - 2,25,000) = Rs. 1,75,000

Goodwill = Super Profits x No. of Years of Purchase
= Rs. ( 1,75,000 x 4 ) = Rs. 7,00,000.

  Is there an error in this question or solution?
Advertisement Remove all ads

APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 3 Goodwill: Nature and Valuation
Exercise | Q 29 | Page 33
Advertisement Remove all ads
Advertisement Remove all ads
Share
Notifications

View all notifications


      Forgot password?
View in app×