# Chapter 3 - Goodwill: Nature And Valuation

#### Question 21:

On 1st April, 2021, 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 of  ` 10,000 while Partners' Capital Accounts showed a balance of  ` 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at  ` 24,000 at four years' purchase of super profit, find average profit per year of the existing firm.

Average profit = total profit of past given years/number of years

Capital Employed = Total Assets - Creditors

= 75,000 -5,000 =  ` 70,000

Normal Profit = Capital Employed×Rate of return/100

Normal Profit = 70,000×20/100

Normal Profit = 14,000

Goodwill of the firm =  ` 24,000

Number of years’ purchase = 4

Goodwill= Super profit × no. of purchases years’

Or, 24,000 = Super Profit / 4

Super Profit =24,000/ 4

Super Profit = 6,000

Average profit = Normal profit + Super profit

20,000=14,000+6,000

#### Average profit of a firm during the last few years is `2,00,000 and the normal rate of return in a similar business is 10%. If the goodwill of the firm is `2,50,000 at 4 years' purchase of super profit, find the capital employed by the firm.

Goodwill= Super profit × No. of purchases years’

2,50,000=(Average profit–Normal profit)×4 (purchases years’)

2,50,000=(Average profit–Normal profit)×4 (purchases years’)

2,50,000=(2,00,000–Normal profit)×4

Or  250,000/4-2,00,000=-Normal profit

Or Normal profit =1,37,500

Normal rate of return=10%

Capital employed=normal profit ×100/ normal rate of return

=1,37,500×100/10=13,75,000

#### Question 23:

Average profit earned by a firm is  ` 1,00,000 which includes undervaluation of stock of  ` 40,000 on an average basis. The capital invested in the business is  ` 6,30,000 and the normal rate of return is 5%. Calculate goodwill of the firm on the basis of 5 times the super profit.

Average normal profit= (Average Profit + Undervaluation of stock on average basis*)

Average normal profit = `(1,00,000+40,000)= `1,40,000

Capital Employed in the business= `6,30,000

Normal Profits=Capital Employed×Normal Rate of Return/100

Normal Profits= `6,30,000×5/100= `31,500

Super Profits=Average Normal Profits - Normal Profits

Super Profits= `(1,40,000-31,500)= `1,08,500

Super Profits= `1,08,500

Goodwill=Super Profits×No. of years of purchase= `(1,08,500×5)= `5,42,500

Goodwill= `(1,08,500×5)= `5,42,500

*Stock has been taken to be closing stock if nothing is specified in the question

#### Question 24:

Average profit earned by a firm is  ` 7,50,000 which includes overvaluation of stock of  ` 30,000 on an average basis. The capital invested in the business is  ` 42,00,000 and the normal tare of return is 15%. Calculate goodwill of the firm on the basis of 3 time the super profit.

Average Profit earned by a firm =  ` 7,50,000
Overvaluation of Stock =
` 30,000
Average Actual Profit = Average Profit earned by a firm – Overvaluation of Stock
or, Average Actual Profit = 7,50,000 – 30,000 =
` 7,20,000

Normal profit = Capital employed×Rate of return/100

Normal profit = 42,00,000×15/100=6,30,000
Super Profit = Actual Average Profit – Normal Profit
or, Super Profit = 7,20,000 – 6,30,000 =
` 90,000
Goodwill = Super Profit × Number of Times
Goodwill = 90,000 × 3 =
` 2,70,000

#### Question 25:

Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st April, 2021. They agreed to value goodwill at 3 years' purchase of Super Profit Method for which they decided to average profit of last 5 years. The profits for the last 5 years were:

 Year Ended Net Profit ( `) 31st March, 2017 1,50,000 31st March, 2018 1,80,000 31st March, 2019 1,00,000 (Including abnormal loss of  ` 1,00,000) 31st March, 2020 2,60,000 (Including abnormal gain (profit) of  ` 40,000) 31st March, 2021 2,40,000

The firm has total assets of  ` 20,00,000 and Outside Liabilities of  ` 5,00,000 as on that date. Normal Rate of Return in similar business is 10%.
Calculate value of goodwill.

 Goodwill =Super Profit×No. of Years' Purchase  =48,000×3= ` 1,44,000

Working Notes:

WN: 1 Calculation of Normal Profits:

 Year Profit/(Loss) ( `) Adjustment Normal Profit ( `) 31 March, 2017 1,50,000 - 1,50,000 31 March, 2018 1,80,000 - 1,80,000 31 March, 2019 1,00,000 1,00,000 2,00,000 31 March, 2020 2,60,000 (40.000) 2,20,000 31 March, 2021 2,40,000 - 2,40,000 Total Profit 9,90,000

WN2: Calculation of Super Profits

Average profit = total profit of past given years / number of years

Average profit =9,90,000/5=1,98,000

Normal profit = Capital employed×Rate of return/100

= 15,00,000×10/100=1,50,000

Super profit = Actual profit - Normal profit

= 1,98,000 – 1,50,000=48,000

WN3: Calculation of Capital Employed

 Capital Employed =Total Assets-Outside Liabilities   =20,00,000-5,00,000= `15,00,000

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

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