# Volume-1 | Chapter- 3 | | Question: 1 to 5 | Ts grewal solution 2019-20 | Class-12th

#### 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:
2016 −
` 12,000; 2017 −  ` 18,000; 2018 −  ` 16,000; 2019 −  ` 14,000.
Calculate amount of Goodwill.

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 2015 −
` 4,00,000; Year 2016 −  ` 3,98,000; Year 2017 −  ` 4,50,000; Year 2018 −  ` 4,45,000 and Year 2019 −  ` 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.

Goodwill=Average Profits×Number of Years' Purchase

Average Profits = Total ProfitsNumber of Years=4,00,000+3,98,000+4,50,000+4,45,000+5,00,0005=21,93,0005= ` 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 2018-19 2017-18 2016-17 2015-16 2014-15 Profits ( `) 8,00,000 15,00,000 18,00,000 4,00,000 (Loss) 13,00,000

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 =50,00,000/510,00,000

Number of years’ purchase = 3

Goodwill= Average profit × no. of purchases years’

Goodwill= 10,00,000 × 3=30,00,000

#### Question 4:

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.

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 1st Year 1,00,000 2nd Year 2,00,000 (1,00,000×2) 3rd Year 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 yearsNumber of Years

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

#### Question 5:

Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take Parv into partnership for 1/4th share on 1st April, 2019. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years are:

 Year 2014-15 2015-16 2016-17 2017-18 2018-19 Profits ( `) 14,000 15,500 10,000 16,000 15,000

Calculate the value of goodwill.

Calculation of Average Profit for Five Years

 Year Profit 2014 – 15 14,000 2015 – 16 15,500 2016 – 17 10,000 2017 – 18 16,000 2018 – 19 15,000 Total Profit 70,500

Average Profit for Five Years=70,500/5=14,100

Calculation of Average Profit for Four Years

 Year Profit 2015 – 16 15,500 2016 – 17 10,000 2017 – 18 16,000 2018 – 19 15,000 Total Profit 56,500

Average Profit for Five Years=56,500/4=14,125

Average Profit of four years is taken to compute the value of goodwill of the firm. This is because Average Profit of four years is more than the Average Profit of five years.

Goodwill= Average profit × no. of purchases years’

Goodwill= 14125 ×4 =56,500