# Double Entry Book Keeping Ts
Grewal Volume 1 2022-2023

# Solutions for Class 12 Commerce Accountancy

# Chapter 3 - Goodwill: Nature And
Valuation

#### 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:

2019 − ` 12,000; 2020 − ` 18,000;2021 − ` 16,000; 2022 − ` 14,000.

Calculate amount of Goodwill.

#### Answer:

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

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

Average profit
=12,000+18,000+16,000+14,000/4=15,000

**Number of years’
purchase = 3**

Goodwill= Average profit × no. of
purchases years’

Goodwill= 15,000 × 3=45,000

#### Question 2:

#### Profits for the five years ending on 31st
March, are as follows:

Year 2018 − ` 4,00,000; Year 2019 − ` 3,98,000; Year 2020
− ` 4,50,000; Year
2021 − ` 4,45,000 and Year 2022 − ` 5,00,000.

Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years'
average profit.

#### Answer:

#### Goodwill=Average Profit×Number of Years' Purchase

Average Profits = Total Profit÷Number of Years

Average Profits =
4,00,000+3,98,000+4,50,000+4,45,000+5,00,000÷5

Average Profits =
21,93,000÷5= ` 4,38,600

**Goodwill =4,38,600×4=****
`**** 17,54,400**

#### 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:

Year |
2022 |
2021 |
2020 |
2019 |
2018 |

Profits (
`) |
8,00,000 |
15,00,000 |
18,00,000 |
4,00,000 (Loss) |
13,00,000 |

#### Answer:

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

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

Average profit =8,00,000+15,00,000+18,00,000-4,00,000
(Loss)+ 13,00,000/5=50,00,000

Average profit
=50,00,000/5÷10,00,000

**Number of years’
purchase = 3**

Goodwill= Average profit × no. of
purchases years’

Goodwill= 10,00,000 × 3=30,00,000

#### Question 4:

Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2022 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:

Year Ended |
Profit (
`) |

31st March, 2022 |
2,88,000; |

31st March, 2021 |
1,81,800; |

31st March, 2020 |
1,87,200; |

31st March, 2019 |
2,53,200. |

Calculate
the value of goodwill.

#### Answer:

Average Profits of Previous three years= 2,88,000+1,81,8000+1,87,200÷3= ` 2,19,000

Average Profits of Previous four years= 2,88,000+1,81,800+1,87,200+2,53,200÷4=
` 2,27,550

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

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#### Question 5:

#### 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=Average Profit×No. of years' purchase

=2,00,000×1.5= ` 3,00,000

__Working
Notes:__

* WN: *1

__Calculation of Profits of last three years__
Year |
Profit |

1 |
1,00,000 |

2 |
2,00,000 (1,00,000×2) |

3 |
3,00,000 (2,00,000×1.5) |

Total Profit |
6,00,000 |

* WN: *2

__Calculation of Average Profit__

*Average Profit=Total Profits for past given years/Number of Years*

*Average Profit =6,00,000/3=** ` 2,00,000*