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Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce PDF Download

Page No 3.28:

Question 1: Goodwill is to be valued at three years' purchase of four years' average profit. Profits for last four years ending on 31st March of the firm were: 2016 − ₹ 12,000; 2017 − ₹ 18,000; 2018 − ₹ 16,000; 2019 − ₹ 14,000.
Calculate amount of Goodwill.

ANSWER:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce

Number of years’ purchase = 3
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce

Page No 3.28:

Question 2: Profits for the five years ending on 31st March, are as follows:
Year 2015 − ₹ 4,00,000; Year 2016 − ₹ 3,98,000; Year 2017 − ₹ 4,50,000; Year 2018 − ₹ 4,45,000 and Year 2019 − ₹ 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.

ANSWER:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce


Page No 3.28:

Question 3: Calculate value of goodwill on the basis of three years' purchase of average profit of the preceding five years which were as follows:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce

ANSWER:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce


Page No 3.28:

Question 4:Calculate the value of firm's goodwill on the basis of one and half years' purchase of the average profit of the last three years. The profit for first year was ₹ 1,00,000, profit for the second year was twice the profit of the first year and for the third year profit was one and half times of the profit of the second year.
ANSWER:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
WN: 2 Calculation of Average Profit
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce


Page No 3.28:

Question 5: Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take Parv into partnership for 1/4th share on 1st April, 2019. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years are:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce

Calculate the value of goodwill.

ANSWER:
Calculation of Average Profit for Five Years
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Calculation of Average Profit for Four Years
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Average Profit of four years is taken to compute the value of goodwill of the firm. This is because Average Profit of four years is more than the Average Profit of five years.
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce 


Page No 3.29:

Question 6: Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2019 for 1/5th share in the future profits. For this purpose, goodwill is to be valued at 100% of the average annual profits of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
ANSWER:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce

Since, the average profits of previous four years is greater than the average profits of previous three years.

Hence, Goodwill = 100% of Average Profits of Previous four years = ₹2,27,550

Page No 3.29:

Question 7: Divya purchased Jyoti's business with effect from 1st April, 2019. Profits shown by Jyoti's business for the last three financial years were:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Calculate the value of firm's goodwill on the basis of two year's purchase of the average profit of the last three years.
ANSWER:

Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce

Page No 3.29:

Question 8: Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years' purchase of average profit of last five years. These profits for the year ended 31st March, were:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce

On 1st April, 2018, a car costing ₹ 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. Interest of ₹ 10,000 on Non-trade Investments is credit to income for the year ended 31st March, 2018 and 2019.
Calculate the value of goodwill after adjusting the above.
ANSWER:

Normal Profits for the year ended 31st March, 2018:
=(Total Profits+Purchase of car wrongly debited − Depreciation on Car − Income from Non−trade Investments)=₹(7,10,000 + 1,00,000 − 25,000 − 10,000)=₹7,75,000
Normal Profits for the year ended 31st March, 2019:
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Goodwill=Average Profits for last 5 years×No. of years of purchaseGoodwill=Average Profits for last 5 years×No. of years of purchase =₹(2,35,000×4)=₹9,40,000


Page No 3.29:

Question 9: Bharat and Bhushan are partners sharing profits in the ratio of 3 : 2. They decided to admit Manu as a partner from 1st April, 2019 on the following terms:
(i) Manu will be given 2/5th share of the profit.

(ii) Goodwill of the firm will be valued at two years' purchase of three years' normal average profit of the firm.
Profits of the previous three years ended 31st March, were:
2019 - Profit ₹ 30,000 (after debiting loss of stock by fire ₹ 40,000).

2018 - Loss ₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).
2017 - Profit ₹ 1,10,000 (including a gain (profit) of ₹ 30,000 on the sale of fixed assets).
Calculate the value of goodwill.
ANSWER:
Normal Profits for the year ended 31st March,2019=(Total Profits+Loss by fire)=₹(30,000+40,000)=₹70,000
Normal Profits for the year ended 31st March,2018=(Total loss − Voluntary retirement Compensation paid)=₹(80,000 −1,10,000)Total loss - Voluntary retirement Compensation paid=₹(80,000 -1,10,000) = ₹30,000
Normal Profits for the year ended 31st March,2017=₹(Total Profit−Gain on sale of Fixed Assets)=₹(1,10,000−30,000)₹Total Profit-Gain on sale of Fixed Assets=₹(1,10,000-30,000) = ₹80,000
Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce
Goodwill=Average Profits for last 3 years × No. of years of purchase=₹(60,000×2)=₹1,20,000


Page No 3.29:

Question 10: Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3 : 2. They admit Kanika into partnership for 1/4th share in profit. Kanika brings in her share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2017 - Profit ₹ 50,000 (including profit on sale of assets ₹ 5,000).

2018 - Loss ₹ 20,000 (including loss by fire ₹ 30,000).

2019 - Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.

ANSWER:

Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce

The document Goodwill: Nature And Valuation (Part - 1) | Accountancy Class 12 - Commerce is a part of the Commerce Course Accountancy Class 12.
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FAQs on Goodwill: Nature And Valuation (Part - 1) - Accountancy Class 12 - Commerce

1. What is goodwill and why is it important in commerce?
Ans. Goodwill refers to the intangible value or reputation that a business has acquired over time. It includes factors such as customer loyalty, brand recognition, and positive relationships with suppliers. Goodwill is important in commerce because it can enhance a company's overall value, attract more customers, and contribute to long-term profitability.
2. How is goodwill calculated and valued in commerce?
Ans. Goodwill is typically calculated as the difference between the purchase price of a business and the fair market value of its net tangible assets. To value goodwill, various methods can be used, including the excess earnings method, the market capitalization method, or the price-to-earnings ratio method. The specific approach depends on factors such as industry norms and the nature of the business.
3. Can goodwill be bought or sold separately from a business?
Ans. Yes, goodwill can be bought or sold separately from a business. In certain situations, a company may decide to sell its goodwill to another entity, which can then utilize the acquired reputation and intangible assets to its advantage. The value of goodwill in such transactions is typically determined through negotiations between the buyer and the seller.
4. What are some examples of factors that contribute to the creation of goodwill?
Ans. Several factors can contribute to the creation of goodwill in a business. These include providing excellent customer service, maintaining a strong brand image, building a loyal customer base, establishing positive relationships with suppliers, consistently delivering high-quality products or services, and engaging in ethical business practices.
5. How does goodwill impact financial statements and business valuation?
Ans. Goodwill is recorded as an intangible asset on a company's balance sheet. It is not amortized but rather subject to periodic impairment tests to ensure its value is not overstated. Goodwill can have a significant impact on a company's financial statements, as it affects the total assets and overall net worth of the business. Additionally, when valuing a business, potential investors or buyers consider the goodwill as a crucial factor in determining its worth.
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