# Chapter 3 - Goodwill: Nature And Valuation

#### Question 36:

Rajan and Rajani are partners in a firm. Their capitals were Rajan  ` 3,00,000; Rajani  ` 2,00,000. During the year 31st March, 2021, the firm earned a profit of  ` 1,50,000. Calculate the value of goodwill of the firm by capitalisation of super profit assuming that the normal rate of return is 20%.

Goodwill=Super Profits×100÷Nominal Rate of Return

Super Profits=Average Profit-Normal Profit

Average Profit= `1,50,000

(Given)Normal Profit=Capital Employed×Normal Rate of Return

Normal Profit=(3,00,000+2,00,000)×20%= `1,00,000

Super Profit=1,50,000-1,00,000= `50,000

Goodwill=50,000×100÷20= ` 2,50,000

#### Question 37:

Average profit of GS & Co. is ` 50,000 per year. Average capital employed in the business is `3,00,000. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.

(i)        Goodwill

#### =20,000×3= ` 60,000

(ii)        Goodwill

#### = ` 2,00,000

Working Notes:

WN1: Calculation of Super Profits

Average Profit=Total Profits for past given years÷No. of Years

= ` 50,000

Normal Profit=Capital Employed×Normal Rate of Return÷100

=3,00,000×10÷100= ` 30,000

Super Profit=Average Profit-Normal Profit

#### Question 38:

A business has earned average profit of  ` 8,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method; and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.
Assets of the business were ` 80,00,000 and its external liabilities  ` 14,40,000.

Capital Employed=Total Assets - External Liabilities

= `(80,00,000-14,40,000)= `65,60,000

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

= `65,60,000×10÷100= `6,56,000

Average Profits= `8,00,000

Super Profits=Average Profits - Normal Profits

= `(8,00,000 - 6,56,000)= `1,44,000

(i)As per Capitalisation of Super Profit method,Goodwill=Super Profit×100÷Normal Rate of Return

= `1,44,000×100÷10= `14,40,000 (ii)As per Super Profit method,Goodwill=Super Profit × No. of years of purchase

= `(1,44,000×3)= `4,32,000

#### =8,00,000-6,00,000= ` 2,00,000

Working Notes:

WN1: Calculation of Average and Super Profits
Average Profit=Total Profits of past years given÷No. of Years

=2,00,000+1,80,000+1,60,000÷3

= ` 1,80,000,

Average Profit (Adjusted) =  ` 1,80,000 - 1,00,000 (Remuneration to partners)

` 80,000Normal Profit=Capital Employed×Normal Rate of Return÷100

=6,00,000×10÷100= ` 60,000

=80,000-60,000= ` 20,000

WN2: Calculation of Capital Employed

Capital Employed=Total Assets-Outside Liabilities

=7,00,000-1,00,000

= ` 6,00,000

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

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