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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