Cases - Valuation of Goodwill & Change in Profit Sharing Ratio Notes | Study Crash Course of Accountancy - Class 12 - Commerce

Commerce: Cases - Valuation of Goodwill & Change in Profit Sharing Ratio Notes | Study Crash Course of Accountancy - Class 12 - Commerce

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 Page 1


ACCOUNTANCY – XII          
 
Step 2- calculate average profits= total profit / number of years 
Step3- calculate goodwill= average profit X no. of years purchase. 
 
Case 1 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Average profit = 2,00,000     = 40,0000 
         5 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 2 
Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.            Rs. 
      1997  40,000 Profit                      2000                average profit of last 2 years 
      1998   80% of previous of year profit   2001                1.5 times of the last year  
      1999  20,000 more than the last year profit    profit 
      Find the value of goodwill. 
 
Solution – 
Profits -        1997  40,000 Profit        = 40,000 
                1998   80% of previous of year profit    = 32,000  
        1999  20,000 more than the last year profit  = 52,000   
  2000                average profit of last 2 years   = 42,000 
2001                1.5 times of the last year profit   = 63,000 
 
Total profits =  40,000 +32,000 + 52,000 +42,000 + 63,000 
  = 2,29,000 
Average profit = 2,29,000     = 45,8000 
         5 
Goodwill =  45,800  X 3  
   = 1,37,400 
Case 3 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years . The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – preceding means past so the profit of 1997 will be ignored 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Page 2


ACCOUNTANCY – XII          
 
Step 2- calculate average profits= total profit / number of years 
Step3- calculate goodwill= average profit X no. of years purchase. 
 
Case 1 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Average profit = 2,00,000     = 40,0000 
         5 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 2 
Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.            Rs. 
      1997  40,000 Profit                      2000                average profit of last 2 years 
      1998   80% of previous of year profit   2001                1.5 times of the last year  
      1999  20,000 more than the last year profit    profit 
      Find the value of goodwill. 
 
Solution – 
Profits -        1997  40,000 Profit        = 40,000 
                1998   80% of previous of year profit    = 32,000  
        1999  20,000 more than the last year profit  = 52,000   
  2000                average profit of last 2 years   = 42,000 
2001                1.5 times of the last year profit   = 63,000 
 
Total profits =  40,000 +32,000 + 52,000 +42,000 + 63,000 
  = 2,29,000 
Average profit = 2,29,000     = 45,8000 
         5 
Goodwill =  45,800  X 3  
   = 1,37,400 
Case 3 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years . The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – preceding means past so the profit of 1997 will be ignored 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
ACCOUNTANCY – XII          
 
Case 4 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years or 5 
years whichever is higher. The profits are as under:- 
      Rs.         Rs. 
      1997  20,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit of past 5 years = 20,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 1,80,000 
Average profit = 1,80,000     = 36,0000 
         5 
Total profit of past 4 years =  (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
So the profits of the past 4 years are higher 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 5 
Calculate goodwill of a firm if it is valued by the aggregate of the last 5 year profits. The profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Goodwill =  2,00,000 
 
Case 6 
Calculate goodwill of a firm if it is valued by the aggregate of the preceding 4 year profits. The profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Goodwill = 1,60,000  
Page 3


ACCOUNTANCY – XII          
 
Step 2- calculate average profits= total profit / number of years 
Step3- calculate goodwill= average profit X no. of years purchase. 
 
Case 1 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Average profit = 2,00,000     = 40,0000 
         5 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 2 
Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.            Rs. 
      1997  40,000 Profit                      2000                average profit of last 2 years 
      1998   80% of previous of year profit   2001                1.5 times of the last year  
      1999  20,000 more than the last year profit    profit 
      Find the value of goodwill. 
 
Solution – 
Profits -        1997  40,000 Profit        = 40,000 
                1998   80% of previous of year profit    = 32,000  
        1999  20,000 more than the last year profit  = 52,000   
  2000                average profit of last 2 years   = 42,000 
2001                1.5 times of the last year profit   = 63,000 
 
Total profits =  40,000 +32,000 + 52,000 +42,000 + 63,000 
  = 2,29,000 
Average profit = 2,29,000     = 45,8000 
         5 
Goodwill =  45,800  X 3  
   = 1,37,400 
Case 3 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years . The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – preceding means past so the profit of 1997 will be ignored 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
ACCOUNTANCY – XII          
 
Case 4 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years or 5 
years whichever is higher. The profits are as under:- 
      Rs.         Rs. 
      1997  20,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit of past 5 years = 20,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 1,80,000 
Average profit = 1,80,000     = 36,0000 
         5 
Total profit of past 4 years =  (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
So the profits of the past 4 years are higher 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 5 
Calculate goodwill of a firm if it is valued by the aggregate of the last 5 year profits. The profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Goodwill =  2,00,000 
 
Case 6 
Calculate goodwill of a firm if it is valued by the aggregate of the preceding 4 year profits. The profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Goodwill = 1,60,000  
ACCOUNTANCY – XII          
 
Some special items to be considered for valuation of goodwill 
items  Included Excluded 
Abnormal losses  loss by fire, loss by theft and loss by accident + add No effect 
Abnormal gains or non recurring incomes lottery profits, windfall gains, 
speculative profits, profit on sale fixed assets 
-less No effect 
Normal expenses depreciation, revenue expenditure, partners salary, 
partners commission, partners remuneration, insurance premium  
*(if its annual than deduct this from all the years or deduct it from AP)  
No effect -less 
Capital expenditure treated as revenue expenditure fixed assets 
purchased, installed, erection or capitalization of any other revenue 
expenditure like repairs on fixed assets   
+ add - 
 CLOSING stock IS OVERVALUED- less from the current year and added to the next years profit 
CLOSING stock IS UNDERVALUED- ADD in the current year and to be deducted from the next year profit 
 
Case 7 
        Mee purchased Sim business from 1st Jan., 2009. The profits disclosed by Sim’s Business for the last three years 
were as follows: 
            2005 -----   Rs.30,000 (Including an Abnormal gain of Rs.5,000) 
            2006 -----   Rs.50,000 (After charging an Abnormal Loss of Rs.10,000)              
            2007 -----   Rs.45,000 (After Rs.10,000 of the depreciation on such a machinery which was destroyed by fire  
during the year) 
       Calculate the Value of firm’s goodwill on the basis of 2 years Purchase of the average Profit for the last three 
years. 
Solution – 
Profits -        2005  30,000 + 5,000 = 35,000 
  2006 50,000 + 10,000 = 60,000 
  2007 45,000 + 10,000 = 55,000 
 
Total profits =  35,000 + 60,000 + 55,000 
  = 1,50,000 
Average profit = 1,50,000     = 50,000 
         3 
Goodwill =  50,000  X 2  
   = 1,00,000 
 
2.  Weighted profit method 
Step1- calculate total profits= sum total of weights X profits (?WP)  
Step 2- calculate average profits= total profit / total weights (?WP/?W) 
Step3- calculate goodwill= average profit X no. of years purchase 
 
Case 1 
The profits earned by a firm during the last four years were as follows: 
         Year Ended 31st March                                            Profits (Rs.) 
                   2000               70,000 
                   2001            1,00,000 
                   2002            1,10,000 
                   2003                       1,50,000 
      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 2000, 2001, 2002, 2003. 
Solution – 
         Year Ended 31st March                                            Profits (Rs.) weights   weighted profit   
                   2000               70,000 1  70,000 
                   2001            1,00,000 2  2,00,000 
                   2002            1,10,000 3  3,30,000 
                   2003                       1,50,000 4  6,00,000  
         10  11,00,0000 
Page 4


ACCOUNTANCY – XII          
 
Step 2- calculate average profits= total profit / number of years 
Step3- calculate goodwill= average profit X no. of years purchase. 
 
Case 1 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Average profit = 2,00,000     = 40,0000 
         5 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 2 
Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.            Rs. 
      1997  40,000 Profit                      2000                average profit of last 2 years 
      1998   80% of previous of year profit   2001                1.5 times of the last year  
      1999  20,000 more than the last year profit    profit 
      Find the value of goodwill. 
 
Solution – 
Profits -        1997  40,000 Profit        = 40,000 
                1998   80% of previous of year profit    = 32,000  
        1999  20,000 more than the last year profit  = 52,000   
  2000                average profit of last 2 years   = 42,000 
2001                1.5 times of the last year profit   = 63,000 
 
Total profits =  40,000 +32,000 + 52,000 +42,000 + 63,000 
  = 2,29,000 
Average profit = 2,29,000     = 45,8000 
         5 
Goodwill =  45,800  X 3  
   = 1,37,400 
Case 3 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years . The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – preceding means past so the profit of 1997 will be ignored 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
ACCOUNTANCY – XII          
 
Case 4 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years or 5 
years whichever is higher. The profits are as under:- 
      Rs.         Rs. 
      1997  20,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit of past 5 years = 20,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 1,80,000 
Average profit = 1,80,000     = 36,0000 
         5 
Total profit of past 4 years =  (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
So the profits of the past 4 years are higher 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 5 
Calculate goodwill of a firm if it is valued by the aggregate of the last 5 year profits. The profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Goodwill =  2,00,000 
 
Case 6 
Calculate goodwill of a firm if it is valued by the aggregate of the preceding 4 year profits. The profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Goodwill = 1,60,000  
ACCOUNTANCY – XII          
 
Some special items to be considered for valuation of goodwill 
items  Included Excluded 
Abnormal losses  loss by fire, loss by theft and loss by accident + add No effect 
Abnormal gains or non recurring incomes lottery profits, windfall gains, 
speculative profits, profit on sale fixed assets 
-less No effect 
Normal expenses depreciation, revenue expenditure, partners salary, 
partners commission, partners remuneration, insurance premium  
*(if its annual than deduct this from all the years or deduct it from AP)  
No effect -less 
Capital expenditure treated as revenue expenditure fixed assets 
purchased, installed, erection or capitalization of any other revenue 
expenditure like repairs on fixed assets   
+ add - 
 CLOSING stock IS OVERVALUED- less from the current year and added to the next years profit 
CLOSING stock IS UNDERVALUED- ADD in the current year and to be deducted from the next year profit 
 
Case 7 
        Mee purchased Sim business from 1st Jan., 2009. The profits disclosed by Sim’s Business for the last three years 
were as follows: 
            2005 -----   Rs.30,000 (Including an Abnormal gain of Rs.5,000) 
            2006 -----   Rs.50,000 (After charging an Abnormal Loss of Rs.10,000)              
            2007 -----   Rs.45,000 (After Rs.10,000 of the depreciation on such a machinery which was destroyed by fire  
during the year) 
       Calculate the Value of firm’s goodwill on the basis of 2 years Purchase of the average Profit for the last three 
years. 
Solution – 
Profits -        2005  30,000 + 5,000 = 35,000 
  2006 50,000 + 10,000 = 60,000 
  2007 45,000 + 10,000 = 55,000 
 
Total profits =  35,000 + 60,000 + 55,000 
  = 1,50,000 
Average profit = 1,50,000     = 50,000 
         3 
Goodwill =  50,000  X 2  
   = 1,00,000 
 
2.  Weighted profit method 
Step1- calculate total profits= sum total of weights X profits (?WP)  
Step 2- calculate average profits= total profit / total weights (?WP/?W) 
Step3- calculate goodwill= average profit X no. of years purchase 
 
Case 1 
The profits earned by a firm during the last four years were as follows: 
         Year Ended 31st March                                            Profits (Rs.) 
                   2000               70,000 
                   2001            1,00,000 
                   2002            1,10,000 
                   2003                       1,50,000 
      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 2000, 2001, 2002, 2003. 
Solution – 
         Year Ended 31st March                                            Profits (Rs.) weights   weighted profit   
                   2000               70,000 1  70,000 
                   2001            1,00,000 2  2,00,000 
                   2002            1,10,000 3  3,30,000 
                   2003                       1,50,000 4  6,00,000  
         10  11,00,0000 
ACCOUNTANCY – XII          
 
Total profits = 11,00,000 
Average profit = 11,00,000     = 1,10,000 
         10 
Goodwill =  1,10,000  X 3  
   = 3,30,000 
 
3. Super profit method 
Step1- calculate total profits 
Step 2- calculate average profits= total profit / number of years 
Step3- calculate normal profits= capital employed (capital invested) X NRR (normal rate of return)  
Step 4- calculate super profits = average profits – normal profits 
Step5- calculate goodwill= super profit X no. of years purchase 
 
Case 1 
A firm earned net profits during the last three years as: 
Year  I  II  III 
Profit (Rs.) 18,000  20,000  22,000 
The capital investment of the firm is Rs. 50,000. A fair return on the capital having regard to this 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. 
Solution – 
Total profits =  18,000 + 20,000 + 22,000 
  = 60,000 
Average profit = 60,000     = 20,000 
         3 
Normal profit =  capital invested X NRR  
        100 
  = 50,000 X 10 = 5,000 
        100   
Super profit = 20,000 – 5,000 = 15,000 
Goodwill =  15,000  X 3  
   = 45,000 
 
Case 2 
A firm earned net profits during the last three years as: 
Year  I  II  III 
Profit (Rs.) 48,000  50,000  52,000 
The capital investment of the firm is Rs. 2,00,000. A fair return on the capital having regard to this, risk involved is 
10%. The remuneration of the partners is estimated to be Rs. 10,000 p.a. Calculate value of goodwill on the basis of 
three years' purchase of the average super profit for the last three years. 
Solution – 
Total profits =  48,000 + 50,000 + 52,000 
  = 1,50,000 
Average profit = 1,50,000     = 50,000 
         3 
Actual average profit = 50,000 – 10,000 = 40,000 
Normal profit =  capital invested X NRR  
        100 
  = 2,00,000 X 10 = 20,000 
           100   
Super profit = 40,000 – 20,000 = 20,000 
Goodwill =  20,000  X 3  
   = 60,000 
 
 
 
 
Page 5


ACCOUNTANCY – XII          
 
Step 2- calculate average profits= total profit / number of years 
Step3- calculate goodwill= average profit X no. of years purchase. 
 
Case 1 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Average profit = 2,00,000     = 40,0000 
         5 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 2 
Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of the last five years. The 
profits are as under:- 
      Rs.            Rs. 
      1997  40,000 Profit                      2000                average profit of last 2 years 
      1998   80% of previous of year profit   2001                1.5 times of the last year  
      1999  20,000 more than the last year profit    profit 
      Find the value of goodwill. 
 
Solution – 
Profits -        1997  40,000 Profit        = 40,000 
                1998   80% of previous of year profit    = 32,000  
        1999  20,000 more than the last year profit  = 52,000   
  2000                average profit of last 2 years   = 42,000 
2001                1.5 times of the last year profit   = 63,000 
 
Total profits =  40,000 +32,000 + 52,000 +42,000 + 63,000 
  = 2,29,000 
Average profit = 2,29,000     = 45,8000 
         5 
Goodwill =  45,800  X 3  
   = 1,37,400 
Case 3 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years . The 
profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – preceding means past so the profit of 1997 will be ignored 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
ACCOUNTANCY – XII          
 
Case 4 
   Calculate goodwill of a firm if it is valued at three year’s purchase of the average profits of preceding 4 years or 5 
years whichever is higher. The profits are as under:- 
      Rs.         Rs. 
      1997  20,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit of past 5 years = 20,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 1,80,000 
Average profit = 1,80,000     = 36,0000 
         5 
Total profit of past 4 years =  (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Average profit = 1,60,000     = 40,0000 
         4 
So the profits of the past 4 years are higher 
Goodwill =  40,000  X 3  
   = 1,20,000 
 
Case 5 
Calculate goodwill of a firm if it is valued by the aggregate of the last 5 year profits. The profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = 40,000 + (10,000) + 30,000 + 60,000 + 80,000 
 = 2,00,000 
Goodwill =  2,00,000 
 
Case 6 
Calculate goodwill of a firm if it is valued by the aggregate of the preceding 4 year profits. The profits are as under:- 
      Rs.         Rs. 
      1997  40,000 Profit                  2000                60,000 Profit 
      1998   10,000 Loss                   2001                80,000 Profit 
      1999  30,000 Profit 
      Find the value of goodwill. 
Solution – 
Total profit = (10,000) + 30,000 + 60,000 + 80,000 
 = 1,60,000 
Goodwill = 1,60,000  
ACCOUNTANCY – XII          
 
Some special items to be considered for valuation of goodwill 
items  Included Excluded 
Abnormal losses  loss by fire, loss by theft and loss by accident + add No effect 
Abnormal gains or non recurring incomes lottery profits, windfall gains, 
speculative profits, profit on sale fixed assets 
-less No effect 
Normal expenses depreciation, revenue expenditure, partners salary, 
partners commission, partners remuneration, insurance premium  
*(if its annual than deduct this from all the years or deduct it from AP)  
No effect -less 
Capital expenditure treated as revenue expenditure fixed assets 
purchased, installed, erection or capitalization of any other revenue 
expenditure like repairs on fixed assets   
+ add - 
 CLOSING stock IS OVERVALUED- less from the current year and added to the next years profit 
CLOSING stock IS UNDERVALUED- ADD in the current year and to be deducted from the next year profit 
 
Case 7 
        Mee purchased Sim business from 1st Jan., 2009. The profits disclosed by Sim’s Business for the last three years 
were as follows: 
            2005 -----   Rs.30,000 (Including an Abnormal gain of Rs.5,000) 
            2006 -----   Rs.50,000 (After charging an Abnormal Loss of Rs.10,000)              
            2007 -----   Rs.45,000 (After Rs.10,000 of the depreciation on such a machinery which was destroyed by fire  
during the year) 
       Calculate the Value of firm’s goodwill on the basis of 2 years Purchase of the average Profit for the last three 
years. 
Solution – 
Profits -        2005  30,000 + 5,000 = 35,000 
  2006 50,000 + 10,000 = 60,000 
  2007 45,000 + 10,000 = 55,000 
 
Total profits =  35,000 + 60,000 + 55,000 
  = 1,50,000 
Average profit = 1,50,000     = 50,000 
         3 
Goodwill =  50,000  X 2  
   = 1,00,000 
 
2.  Weighted profit method 
Step1- calculate total profits= sum total of weights X profits (?WP)  
Step 2- calculate average profits= total profit / total weights (?WP/?W) 
Step3- calculate goodwill= average profit X no. of years purchase 
 
Case 1 
The profits earned by a firm during the last four years were as follows: 
         Year Ended 31st March                                            Profits (Rs.) 
                   2000               70,000 
                   2001            1,00,000 
                   2002            1,10,000 
                   2003                       1,50,000 
      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 2000, 2001, 2002, 2003. 
Solution – 
         Year Ended 31st March                                            Profits (Rs.) weights   weighted profit   
                   2000               70,000 1  70,000 
                   2001            1,00,000 2  2,00,000 
                   2002            1,10,000 3  3,30,000 
                   2003                       1,50,000 4  6,00,000  
         10  11,00,0000 
ACCOUNTANCY – XII          
 
Total profits = 11,00,000 
Average profit = 11,00,000     = 1,10,000 
         10 
Goodwill =  1,10,000  X 3  
   = 3,30,000 
 
3. Super profit method 
Step1- calculate total profits 
Step 2- calculate average profits= total profit / number of years 
Step3- calculate normal profits= capital employed (capital invested) X NRR (normal rate of return)  
Step 4- calculate super profits = average profits – normal profits 
Step5- calculate goodwill= super profit X no. of years purchase 
 
Case 1 
A firm earned net profits during the last three years as: 
Year  I  II  III 
Profit (Rs.) 18,000  20,000  22,000 
The capital investment of the firm is Rs. 50,000. A fair return on the capital having regard to this 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. 
Solution – 
Total profits =  18,000 + 20,000 + 22,000 
  = 60,000 
Average profit = 60,000     = 20,000 
         3 
Normal profit =  capital invested X NRR  
        100 
  = 50,000 X 10 = 5,000 
        100   
Super profit = 20,000 – 5,000 = 15,000 
Goodwill =  15,000  X 3  
   = 45,000 
 
Case 2 
A firm earned net profits during the last three years as: 
Year  I  II  III 
Profit (Rs.) 48,000  50,000  52,000 
The capital investment of the firm is Rs. 2,00,000. A fair return on the capital having regard to this, risk involved is 
10%. The remuneration of the partners is estimated to be Rs. 10,000 p.a. Calculate value of goodwill on the basis of 
three years' purchase of the average super profit for the last three years. 
Solution – 
Total profits =  48,000 + 50,000 + 52,000 
  = 1,50,000 
Average profit = 1,50,000     = 50,000 
         3 
Actual average profit = 50,000 – 10,000 = 40,000 
Normal profit =  capital invested X NRR  
        100 
  = 2,00,000 X 10 = 20,000 
           100   
Super profit = 40,000 – 20,000 = 20,000 
Goodwill =  20,000  X 3  
   = 60,000 
 
 
 
 
ACCOUNTANCY – XII          
 
 
Case 3 
The average profit earned by a firm is Rs. 1,00,000 which includes undervaluation of stock of Rs. 40,000 on an 
average basis. The capital invested in the business is Rs. 6,00,000 and the normal rate of return is 5%. Calculate 
goodwill of the firm on the basis of 5 times the super profit. 
Solution – 
Actual average profit = 1,00,000 + 40,000 = 1,40,000 
Normal profit =  capital invested X NRR  
        100 
  = 6,00,000 X 5 = 30,000 
           100   
Super profit = 1,40,000 – 30,000 = 1,10,000 
Goodwill = 1,10,000  X 5  
   = 5,50,000 
 
Case 4 
On 1st April, 2013 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 Fund of 10,000 while partner’s Capital accounts showed a balance of 60,000. If 
the Normal Rate of Return is 20% and the goodwill of the firm is valued at 24,000, at four year’s purchase of super  
profit, find the average profits per year, of the existing firm.  
 
Solution – goodwill = super profit X no. of years of purchase 
  24,000 = super profit X 4 
  Super profit = 24,000   = 6,000 
    4  
Normal profit = capital invested X NRR  
        100 
 = (75,000 – 5,000) X 20 
         100  
 = 70,000 X 20 = 14,000 
       100  
Super profit = average profit -  normal profit  
  6,000 = average profit – 14,000 
average profit = 14,000 + 6,000 = 20,000 
 
Capitalization of average profits 
Step1- calculate average profits= total profit / number of years 
Step2- calculate capitalized value of average profits= average profits/ NRR 
Step3- calculate goodwill= capitalized value of average profits – capital employed 
Capital employed= total assets – current liabilities  
 
Case 1 
The average profits of a firm is Rs.48,000. The total assets of the firm are Rs.8,00,000. Value of other liabilities is 
Rs.5,00,000. Average rate of return in the same business is 12%. 
    Calculate the goodwill from capitalisation of average profits method. 
Solution- 
    average profits = 48,000 
    capitalised value of average profit = average profits X 100 
                                                                            NRR 
 
                                                                 = 48,000 X 100 =  4,00,000 
                                                                                12 
       Capital employed =  toatal assets – current liabilties  
                                        =  8,00,000 – 5,00,000 = 3,00,000 
        goodwill= capitalized value of average profits – capital employed 
                       = 4,00,000 – 3,00,000 = 1,00,000 
 
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