Question
21:
On 1st April, 2022, 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.
Answer:
Average profit = total profit of
past given years/number of years
Capital Employed = Total Assets - Creditors
= 75,000 -5,000 = ` 70,000
Goodwill of the firm = ` 24,000
Number of years’ purchase = 4
Goodwill= Super profit × no. of purchases years’
Or, 24,000 = Super Profit / 4
=24,000/ 4
=6,000
Average profit = Normal profit+ Super profit
20,000=14,000+6,000
Question
22:
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.
Answer:
Goodwill= Super profit × no. of
purchases years’
2,50,000=(Average
profit – Normal profit ) × 4 purchases years’
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
Capital
employed =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.
Answer:
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=
`6,30,000×5/100= `31,500
Super Profits=Average Normal Profits - Normal Profits=
`(1,40,000-31,500)=
`1,08,500
Goodwill=Super Profits × No. of years of purchase=
`(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 rate of return is 15%. Calculate goodwill of the firm on the basis of 3 time the super profit.
Answer:
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 = 42,00,000×15/6,30,000
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, 2022. 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, 2018 |
1,50,000 |
|
|
31st
March, 2019 |
1,80,000 |
|
|
31st
March, 2020 |
1,00,000 |
(Including
abnormal loss of ` 1,00,000) |
|
31st
March, 2021 |
2,60,000 |
(Including
abnormal gain (profit) of ` 40,000) |
|
31st
March, 2022 |
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.
Answer:
|
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, 2018 |
1,50,000 |
- |
1,50,000 |
|
31 March, 2019 |
1,80,000 |
- |
1,80,000 |
|
31 March, 2020 |
1,00,000 |
1,00,000 |
2,00,000 |
|
31 March, 2021 |
2,60,000 |
(40.000) |
2,20,000 |
|
31 March, 2022 |
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 |