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 = 1,00,000Read More
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