D. K. Goel solutions for Accountancy Volume 1 and 2 [English] Class 12 ISC chapter 2 - Goodwill : Concept and Valuation [Latest edition]

Define goodwill.

Write any four factors which affect the goodwill of a partnership firm.

Why is ‘Goodwill’ considered an ‘Intangible Asset’ but not a ‘Fictitious Asset’?

On what occasions does the need for valuation of goodwill arise?

Give one important feature of non-purchased goodwill.

Explain various methods of valuation of goodwill.

What is super profit?

Distinguish between average profit and super profit method of valuation of goodwill.

What is meant by number of year’s purchase in the valuation of a firm’s goodwill?

Give the formula for valuation of goodwill by the Capitalisation of Average Profit Method.

Madhur and Co. acquired the business of Vishu for a purchase consideration of ₹ 11,00,000 which was paid by cheque. The assets and liabilities taken over was as follows:

You are required to assertain the value of goodwill and pass necessary Journal entries.

The goodwill of a firm is valued at 4 years’ purchase of average profits of last five years. The profits of the last five years were:

Calculate the amount of goodwill.

X purchased the business of Y from 1st April, 2024. For this purpose goodwill is to be valued at 100% of the average annual profits of the last four years. The profits shown by Y’s business for the last four years were:

Verification of books of accounts revealed the following:

1. During the year ended 31st March, 2022, a machine got destroyed in accident and ₹ 60,000 was written off as loss in Profit and Loss Account.
2. On 1st July 2022, Two Computers costing ₹ 40,000 each were purchased and were debited to Travelling Expenses Account on which depreciation is to be charged @ 10% p.a. on Straight Line Method.

Calculate the value of goodwill.

Hint: Profit for the year ended 31st March 2023 ₹ 2,24,000 and for 2024 ₹ 1,92,000.

A, B and C are partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. They decide to take D into partnership for `1/4`th share on 1st April, 2022. For this purpose, goodwill is to be valued at 3 times the average annual profits of the previous four or five years whichever is higher. The agreed profits for goodwill purpose of the past five years are as follows:

Calculate the value of Goodwill.

A, B and C are partners sharing profits and losses equally. They agree to admit D for equal share. For this purpose goodwill is to be valued at 3 year’s purchase of average profits of last 5 years which were as follows:

On 1st October, 2021 a computer costing ₹ 40,000 was purchased and debited to office expenses account on which depreciation is to be charged @ 25% p.a. Calculate the value of goodwill.

The profits earned by a firm during the last four years were as follows:

Calculate the value of goodwill on the basis of three year’s purchase of weighted average profits. Weights to be used are 1, 2, 3 and 4 respectively to the profits for 2019, 2020, 2021 and 2022.

Following information is available about the business of a firm:

1. Profits: In 2020, ₹ 40,000; In 2021, ₹ 50,000; In 2022, ₹ 60,000.
2. Nonrecurring income of ₹ 1,000 is included in the profits of 2021.
3. Profits of 2020 have been reduced by ₹ 6,000 because goods were destroyed by fire.
4. Goods have not been insured but it is thought to insure them in future. The insurance premium is estimated at ₹ 400 per year.
5. Reasonable remuneration of the proprietor of business is ₹ 6,000 per year, but it has not been taken into account for calculation of above mentioned profits.
6. Profits of 2022 include ₹ 5,000 income on investment.

Goodwill is agreed to be valued at two year’s purchase of the weighted average profits of the past three years. The appropriate weights to be used are 2020 - 1; 2021 - 2; 2022 - 3.

Calculate the value of goodwill on the basis of three year’s purchase of the weighted average profits of the last five years. Profits to be weighted 1, 2, 3, 4 and 5, the greatest weightage to be given to last year. Profits of the last five years were:

Books of Accounts of the firm revealed that:

1. Closing Stock as on 31st March, 2020 was overvalued by ₹ 40,000.
2. Repairs to Machinery ₹ 60,000 were wrongly debited to Machinery Account on 1st July, 2022. Depreciation was charged on Machinery @ 20% p.a. on diminishing balance method.

Hint: Weighted Profit for the year ended 31st March 2023 ₹ 5,16,000 and 2024 ₹ 10,51,000.

A partnership firm earned net profits during the last four years as follows:

The capital investment in the firm throughout the above mentioned period has been ₹ 3,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital.

Calculate the value of goodwill on the basis of 3 year’s purchase of average super profits earned during the above-mentioned four years.

The capital of the firm of Anuj and Benu is ₹ 10,00,000 and the market rate of interest is 15%. Annual salary to the partners is ₹ 60,000 each. The profit for the last three years were ₹ 2,80,000, ₹ 3,80,000 and ₹ 4,20,000. Goodwill of the firm is to be valued on the basis of two years purchase of last three years average super profits. Calculate the goodwill of the firm.

Find out the capital employed from the following information:

Value of Goodwill of a firm at 3 years’ purchase of Super Profits is ₹ 3,75,000. Average Capital Employed in the firm is ₹ 15,00,000. Profits of the last 3 years are:

Find out the Normal Rate of Return.

A and B are partners. They admit C for `1/4"th"` share in profits. For this purpose goodwill is to be valued at three year’s purchase of super profits.

Following information is provided to you:

The normal rate of return is 15% p.a. Average Profits are ₹ 2,00,000 per year. You are required to calculate C’s share of goodwill.

Hint: Sundry Assets will be ignored.

On April 1^st 2024, an existing firm had assets of ₹ 5,00,000 including cash of ₹ 20,000. The firm had a General Reserve of ₹ 90,000, partner’s capital accounts showed a balance of ₹ 3,80,000 and creditors amounted to ₹ 30,000. If the normal rate of return is 20% and the goodwill of the firm is valued at ₹ 64,000 at 4 year’s purchase of super profit, find the average profits of the firm.

In a partnership firm total capital of partners is ₹ 12,00,000 and balance in Profit and Loss A/c (Debit) is ₹ 3,00,000. Average profits of past 3 years are ₹ 1,05,000. If the goodwill of the firm is ₹ 60,000 at 4 years’ purchase of super profits, find the normal rate of return.

The average profits of a firm is ₹ 48,000. The total assets of the firm are ₹ 8,00,000. Value of outside liabilities is ₹ 5,00,000. Average rate of return in the same business is 12%. Calculate goodwill from capitalisation of average profits method.

A firm’s average net profits of last four years were ₹ 2,50,000. It includes an abnormal profit of ₹ 19,000 each year. The firm had assets of ₹ 15,50,000 including cash of ₹ 20,000, Debtors ₹ 2,35,000 and Stock ₹ 1,15,000. Its creditors were ₹ 3,00,000 and outstanding expenses were ₹ 50,000. The value of the goodwill as per the capitalization of average profit method was valued at ₹ 4,50,000. Find out the Normal Rate of Return.

Raju and Rinku were partners sharing profits and losses in the ratio 3 : 2. They admitted Sumit as a new partner for 1/3 share. On the date of admission Capitals of Raju and Rinku were ₹ 5,50,000 and ₹ 6,50,000 respectively, also, General Reserve of ₹ 3,00,000 and Profit and Loss (Dr.) balance of ₹ 1,00,000 were appearing in the books of accounts. Firm made an average profit of ₹ 2,40,000 during the last few years and the normal rate of earning was expected to be 12%. Calculate the Goodwill of the firm by Capitalisation Method.

Calculate the value of goodwill according to capitalisation of Super Profits Method in the following:

The average profits of a firm is ₹ 48,000. The total assets of the firm are ₹ 8,00,000. Value of outside liabilities is ₹ 5,00,000. Average rate of return in the same business is 12%.

The following information relates to a partnership firm:

1. Profits/Losses for the last six years:
   

   1st year	₹ 20,000 Profit
   2nd year	₹ 60,000 Profit
   3rd year	₹ 10,000 Loss
   4th year	₹ 60,000 Profit
   5th year	₹ 50,000 Profit
   6th year	₹ 72,000 Profit

2. Average Capital Employed is ₹ 2,00,000.
3. Rate of normal profit is 15%.

Find out the value of goodwill on the basis of:

1. Four years’ purchase of average profits.
2. Four years’ purchase of super profits.
3. Capitalisation of average profits.
4. Capitalisation of super profits.

Calculate the value of goodwill as on 1st April, 2022, on the basis of `2 1/2` year’s purchase of the average profits of the last five years. The profits and losses for the years ending 31st March were: 2017 ₹ 80,000; 2018 ₹ 1,00,000; 2019 Loss ₹ 30,000; 2020 ₹ 1,70,000; 2021 ₹ 1,60,000 and 2022 ₹ 1,80,000. You are informed that the profits of the year ending 31st March 2021 included profit on sale of a fixed asset amounting to ₹ 50,000 and the profits for the year 2022 were affected by a loss due to fire amounting to ₹ 20,000.

Hint: Profit for the year 2017 will be ignored.

Calculate the value of goodwill at 2 year’s purchase of the average profits of the last 3 years. The profit for the first year was ₹ 50,000, for second year twice the profit of first year and for the third year one and half times the profit of the second year.

Rishi and Suman were partners in a firm. Their capitals were Rishi ₹ 1,20,000 and Suman ₹ 80,000. The normal rate of return in similar business is 12%. The profits of the last four years were:

Calculate goodwill of the firm based on:

1. Three years’ purchase of the last three years’ average profits.
2. Capitalisation of last 3 years’ super profit.

Hint: Average Profit of last 3 years is ₹ 30,000.

A firm earns a profit of ₹ 37,000 per year. In the same business a 10% return is generally expected. The total assets of the firm are 4,00,000. The value of outside liabilities is ₹ 90,000. Find out the value of goodwill.

An existing firm had assets of ₹ 4,00,000 including cash of ₹ 15,000. Its creditors amounted to ₹ 20,000 on that date. The partner’s capital accounts showed a balance of ₹ 3,00,000 and reserves amounted to ₹ 80,000. If the normal rate of return is 10% and the goodwill of the firm is valued at ₹ 75,000 at 3 year’s purchase of super profits, find the average profits of the firm.

Yash and Karan were partners in an interior designer firm. Their fixed capitals were ₹ 6,00,000 and ₹ 4,00,000 respectively. There were credit balances in their current accounts of ₹ 4,00,000 and ₹ 5,00,000 respectively. The firm had a balance of ₹ 1,00,000 in General Reserve. The firm did not have any liability. They admitted Radhika into partnership for `1/4`th share in the profits of the firm. The average profits of the firm for the last five years were ₹ 5,00,000. Calculate the value of goodwill of the firm by capitalization of average profits method. The normal rate of return in the business is 10%.

A business has earned average profits of ₹ 1,00,000 during the last few years and the normal rate of return in similar business is 10%. Find out the value of Goodwill by:

1. Capitalisation of super profit method and
2. Super profit method if the goodwill is valued at 3 years purchase of super profit.

The assets of the business were ₹ 10,00,000 and its external liabilities were ₹ 1,80,000.

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

1. two year’s purchase of super profits earned on average basis during the above mentioned three years.
2. by capitalisation of average profits method.

Average profit of the firm is ₹ 3,00,000. Total assets of the firm are ₹ 24,00,000 whereas Partner’s Capital is ₹ 20,00,000. If the normal rate of return in a similar business is 12% of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?

The following information relates to a partnership firm:

1. Sundry Assets of the firm ₹ 6,80,000. Outside Liabilities ₹ 60,000.
2. Profits and losses for the past years: Profit 2021 ₹ 50,000; Loss 2022 ₹ 10,000; Profit 2023 ₹ 1,64,000 and Profit 2024 ₹ 1,80,000.
3. The normal rate of return in a similar type of business is 12%.

Calculate the value of goodwill on the basis of:

1. Three year’s purchase of average profits.
2. Three year’s purchase of super profits.
3. Capitalisation of average profits.
4. Capitalisation of super profits.

Which of the following is true in relation to goodwill?

The excess amount which the firm can get on selling its assets over and above the saleable value of its assets is called ______.

Which of the following is not true in relation to goodwill?

When goodwill is not purchased goodwill account can ______.

The goodwill of the firm is not affected by:

Capital employed by a partnership firm is ₹ 5,00,000. Its average profit is ₹ 60,000. The normal rate of retum in similar type of business is 10%. What is the amount of super profits?

Weighted average method of calculating goodwill is used when ______.

The profits earned by a business over the last 5 years are as follows:

₹ 20,000; ₹ 30,000; ₹ 10,000; ₹ 50,000 and ₹ 2,000 (loss). Based on 2 years of purchases of the last 4 years’ average profits, the value of goodwill will be:

The normal commercial yield on capital invested in a business is 10% p.a. The net capital invested in the business is ₹ 5,00,000. Amount of goodwill. Based on 3 years purchase of super profits is ₹ 30,000. The average profits will be ______.

Tangible assets of the firm are ₹ 14,00,000 and outside liabilities are ₹ 4,00,000. Profit of the firm is ₹ 1,50,000 and normal rate of return is 10%. The amount of capital employed will be ______.

Under the capitalisation method, the formula for calculating the goodwill is ______.

Total assets of a firm including fictitious assets of ₹ 5,000 are ₹ 85,000. The net liabilities of the firm are ₹ 30,000. The normal rate of return is 10% and the average profits of the firm are ₹ 8,000. Calculate the goodwill as per capitalisation of super profits.

Total capital employed in the firm is ₹ 8,00,000, reasonable rate of return is 15% and profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per capitalization method would be ______.

The average capital employed of a firm is ₹ 4,00,000 and the normal rate of return is 15%. The average profit of the firm is ₹ 80,000 per annum. If the remuneration of the partners is estimated to be ₹ 10,000 per annum, then on the basis of two years purchase of super-profit, the value of the goodwill will be ______.

A firm earns ₹ 1,10,000. The normal rate of return is 10%. The assets of the firm amounted to ₹ 11,00,000 and liabilities to ₹ 1,00,000. Value of goodwill by capitalisation of Average Actual Profits will be ______.

Capital invested in a firm is ₹ 5,00,000. Average profits of the firm are ₹ 64,000 (after an abnormal loss of ₹ 4,000). Value of goodwill at four times the super profits is ₹ 72,000. What is the normal rate of return?

The balance in Partners’ Capital Accounts is ₹ 7,00,000 and that in Advertisement Suspense A/c is ₹ 2,00,000. Their normal profits are ₹ 60,000 and super profits are ₹ 10,000. What is the normal rate of return?

Goodwill is affected by the following factors except:

Choose the components required to calculate goodwill of a firm by capitalisation of average profits method.

P: The normal profits of a similar firm in the industry.

Q: The average profits of the firm.

R: The number of years purchase.

S: The actual capital employed in the business.

Assertion (A): Goodwill is valued on the basis of normal business profit. For ascertaining normal business profit, abnormal losses are added and abnormal profits are deducted.

Reason (R): Abnormal losses and abnormal profits are adjusted to net profit because they may or may not happen in future.

In the context of the above two statements, which of the following is correct?

Assertion (A): Goodwill is an intangible but not a fictitious asset.

Reason (R): Goodwill is an intangible asset because it does not have a physical existence but it is a valuable asset because it is helpful in earning excess profits.

In the context of the above two statements, which of the following is correct?

Assertion (A): Goodwill exists only when a firm earns more profits than normal profits.

Reason (R): Self generated goodwill is shown in the books because consideration in money or money’s worth has been paid for it.

In the context of the above two statements, which of the following is correct?

Assertion (A): Value of goodwill is subjective and not an exact value under any method.

Reason (R): Value of goodwill is subjective because it is based on estimates as to number of years purchase or rate of return on capital employed.

In the context of the above two statements, which of the following is correct?

Assertion (A): Goodwill is an intangible asset which is recognised (recorded) in the books of accounts only when consideration has been paid for it.

Reason (R): Valuation of goodwill is necessary at the time of reconstitution of a firm because sacrificing partners have to be compensated by gaining partners.

In the context of the above two statements, which of the following is correct?

Assertion (A): Goodwill is a fictitious asset.

Reason (R): Goodwill has a realisable value.

Which one of the following is correct?