# Chapter 3 - Goodwill: Nature And Valuation

Page No 3.29:

Question 11:

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:
2019 - Profit
` 50,000 (including profit on sale of assets  ` 5,000).
2020 - Loss
` 20,000 (including loss by fire  ` 30,000).
2021 - 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.

Normal Profits for the year ended 31st March, 2019= (Total Profits-Profit on Sale of Assets)= `(50,000-5,000)= `45,000

Normal Profits for the year ended 31st March, 2020= (Loss by fire - Total Loss)=
`(20,000-30,000)=  `10,000

Normal Profit for the year ended 31st March, 2021= (Total Profit - Insurnace Claim Received-Interest on Invetsment -Dividend Received)

= `(70,000-18,000-8,000)= `44,000

Average Profits=
Total Normal Profits from the year ended 31st March,2019 to 31st March, 2021/3

= `45,000+10,000+44,000/3

= `33,000

Goodwill=Average Profits for the last three years × No. of years of Purchase

Goodwill= `(33,000×2)= `66,000

Goodwill= `66,000

Kanika's Share of Goodwill=
`66,000×14= `16,500

#### Sumit purchased Amit's business on 1st April, 2021. Goodwill was decided to be valued at two years' purchase of average normal profit of last four years. The profits for the past four years were:

 Year Ended 31st March, 2018 31st March, 2019 31st March, 2020 31st March, 2021 Profits ( `) 80,000 1,45,000 1,60,000 2,00,000

Books of Account revealed that:
(i) Abnormal loss of
` 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2018.
(ii) A fixed asset was sold in the year ended 31st March, 2019 and gain (profit) of
` 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2020 assets of the firm were not insured due to oversight. Insurance premium not paid was
` 15,000.
Calculate the value of goodwill.

Goodwill=Average Profit×No. of years' purchase

Goodwill =1,41,250×2= ` 2,82,500

Working Notes:

WN: 1 Calculation of Normal Profits

 Year Profit/(Loss) ( `) Adjustment Normal Profit ( `) 31 March, 2018 80,000 20,000 1,00,000 31 March, 2019 1,45,000 (25,000) 1,20,000 31 March, 2020 1,60,000 (15,000) 1,45,000 31 March, 2021 2,00,000 - 2,00,000 5,65,000

WN: 2 Calculation of Average Profit
Average Profit=Total Profit for past given years ÷ Number of Years

Average Profit=5,65,000/4= ` 1,41,250

#### Question 13:

Profits of a firm for the year ended 31st March for the last five years were:

 Year Ended 31st March, 2017 31st March, 2018 31st March, 2019 31st March, 2020 31st March, 2021 Profits ( `) 20,000 24,000 30,000 25,000 18,000

Calculate value of goodwill on the basis of three years' purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2017, 2018, 2019, 2020 and 2021.

 Year Profit × Weight = Product 2017 20,000 × 1 = 20,000 2018 24,000 × 2 = 48,000 2019 30,000 × 3 = 90,000 2020 25,000 × 4 = 1,00,000 2021 18,000 × 5 = 90,000 Total 15 3,48,000

Weighted Average profit = total profit of past given years/ Total of Weighted

Weighed Average profit =3,48,000/15=23,200

Number of years’ purchase = 3

Goodwill= Weighted Average profit × no. of purchases years’

Goodwill=  23,200×3 =69,600

#### Question 14:

Raman and Daman are partners sharing profits in the ratio of 60 : 40 and for the last four years they have been getting annual salaries of  ` 50,000 and  ` 40,000 respectively. The annual accounts have shown the following net profit before charging partners' salaries:
Year ended 31st March, 2019 −
` 1,40,000; 2020 −  ` 1,01,000 and 2021 −  ` 1,30,000.
On 1st April, 2021, Zeenu is admitted to the partnership for 1/4th share in profit (without any salary). Goodwill is to be valued at four years' purchase of weighted average profit of last three years (after partners' salaries); Profits to be weighted as 1 : 2 : 3, the greatest weight being given to the last year. Calculate the value of Goodwill.

 Year Profits before charging Salary ( `) Profits after charging Salary ( `) Weights Weighted Profits ( `) 31st March, 2019 1,40,000 1,40,000- 90,000= 50,000 1 50,000 31st March, 2020 1,01,000 1,01,000- 90,000= 11,000 2 22,000 31st March, 2021 1,30,000 1,30,000- 90,000= 40,000 3 1,20,000 Total 6 1,92,000

Weighted Average Profits=Total of Weighted Profits/Total Weights= `1,92,000/6= `32,000

Goodwill=Weighted Average Profits × No. of years of Purchase = `(32,000×4)=  `1,28,000

#### Page No 3.30:

Question 15: The capital of the firm of Anuj and Benu is `10,00,000 and the market rate of interest is 15%. Annual salary to the partners is `60,000 each. The profit for the last three years were `3,00,000, `3,60,000 and `4,20,000. Goodwill of the firm is to be valued on the basis of two years' purchase of last three years average super profit. Calculate the goodwill of the firm. (CBSE 2021)

#### Normal Profit=1,50,000

Goodwill= Super profit × no. of purchases years’

#### =1,80,000

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## Chapter-3: Goodwill: Nature and Valuation | 2021-2022

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