# Volume-1 | Chapter- 3 | | Question: 11 to 15 | Ts grewal solution 2019-20 | Class-12th

#### Question 11:

Sumit purchased Amit's business on 1st April, 2019. Goodwill was decided to be valued at two years' purchase of average normal profit of last four years. The profits for the past four years were:

 Year Ended 31st March, 2016 31st March, 2017 31st March, 2018 31st March, 2019 Profits ( `) 80,000 1,45,000 1,60,000 2,00,000

Books of Account revealed that:
(i) Abnormal loss of
` 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2016.
(ii) A fixed asset was sold in the year ended 31st March, 2017 and gain (profit) of  ` 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2018 assets of the firm were not insured due to oversight. Insurance premium not paid was  ` 15,000.
Calculate the value of goodwill.

#### Answer:

Goodwill=Average Profit×No. of years' purchase

Goodwill =1,41,250×2= ` 2,82,500

Working Notes:

WN: 1 Calculation of Normal Profits

 Year Profit/(Loss) ( `) Adjustment Normal Profit ( `) 31 March, 2016 80,000 20,000 1,00,000 31 March, 2017 1,45,000 (25,000) 1,20,000 31 March, 2018 1,60,000 (15,000) 1,45,000 31 March, 2019 2,00,000 - 2,00,000 5,65,000

WN: 2 Calculation of Average Profit

Average Profit=Total Profit for past given years Number of Years =5,65,0004= ` 1,41,250

#### Question 12:

Geet and Meet are partners in a firm. They admit Jeet into partnership for equal share. It was agreed that goodwill will be valued at three years' purchase of average profit of last five years. Profits for the last five years were:

 Year Ended 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018 31st March, 2019 Profits ( `) 90,000 (Loss) 1,60,000 1,50,000 65,000 1,77,000

Books of Account of the firm revealed that:
(i) The firm had gain (profit) of
` 50,000 from sale of machinery sold in the year ended 31st March, 2016. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of
` 20,000 incurred in the year ended 31st March, 2017 because of a machine becoming obsolete in  accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2017 amounting to  ` 1,00,000 was debited to Repairs Account.  Depreciation is charged @ 20% p.a. on Written Down Value Method.
Calculate the value of goodwill.

#### Answer:

 Particulars Year 31st Mar., 2015 31st Mar., 2016 31st Mar., 2017 31st Mar., 2018 31st Mar., 2019 Profit/Loss (90,000) 1,60,000 1,50,000 65,000 1,77,000 Less: Gain on Sale of Machinery 50,000 Add: Abnormal Loss 20,000 Add: Overhaul of existing machinery Debited to Repairs A/c 1,00,000 Less: Depreciation @20% p.a. 15,000 17,000 Normal Profit/Loss (90,000) 1,10,000 1,70,000 1,50,000 1,60,000

Average Profits=Normal profits from the year ended 31st March,2015 to 31st March,20195= `-90,000+1,10,000+1,70,000+1,50,000+1,60,0005= `1,00,000

Goodwill=Average profits of the last 5 years × No. of years of Purchase= `(1,00,000×3)= `3,00,000

#### Question 13:

Profits of a firm for the year ended 31st March for the last five years were:

 Year Ended 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018 31st March, 2019 Profits ( `) 20,000 24,000 30,000 25,000 18,000

Calculate value of goodwill on the basis of three years' purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2015, 2016, 2017, 2018 and 2019.

#### Answer:

 Year Profit × Weight = Product 2015 20,000 × 1 = 20,000 2016 24,000 × 2 = 48,000 2017 30,000 × 3 = 90,000 2018 25,000 × 4 = 1,00,000 2019 18,000 × 5 = 90,000 Total 15 3,48,000

Weighted Average profit = total profit of past given years/ Total of Weighted

Weighed Average profit =3,48,000/15=23,200

Number of years’ purchase = 3

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

Goodwill=  23,200×3 =69,600

#### Question 14:

A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2019, C is admitted to the partnership for 1/4th share of profits. For this purpose, goodwill is to be valued at two years' purchase of last three years' profits (after allowing partners' remuneration). Profits to be weighted 1 : 2 : 3, the greatest weight being given to last year. Net profit before partners' remuneration were: 2016-17 :  ` 2,00,000; 2017-18 :  ` 2,30,000; 2018-19 :  ` 2,50,000. The remuneration of the partners is estimated to be  ` 90,000 p.a. Calculate amount of goodwill.

#### Answer:

 Year Profit before Partners’ Remuneration – Partners’ Remuneration = Profit after Partners’ Remuneration 2016-17 2,00,000 – 90,000 = 1,10,000 2017-18 2,30,000 – 90,000 = 1,40,000 2018-19 2,50,000 – 90,000 = 1,60,000

 Year Profit × Weight = Product 2016-17 1,10,000 × 1 = 1,10,000 2017-18 1,40,000 × 2 = 2,80,000 2018-19 1,60,000 × 3 = 4,80,000 Total 6 8,70,000

Weighted Average Profit = Total Product of ProfitsTotal of Weightsor, Weighted Average Profit = 8,70,0006 =  ` 1,45,000

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

Goodwill=  1,45,000×2 =2,90,000

#### Question 15:

Raman and Daman are partners sharing profits in the ratio of 60 : 40 and for the last four years they have been getting annual salaries of  ` 50,000 and  ` 40,000 respectively. The annual accounts have shown the following net profit before charging partners' salaries:
Year ended 31st March, 2017 −  ` 1,40,000; 2018 −  ` 1,01,000 and 2019 −  ` 1,30,000.
On 1st April, 2019, Zeenu is admitted to the partnership for 1/4th share in profit (without any salary). Goodwill is to be valued at four years' purchase of weighted average profit of last three years (after partners' salaries); Profits to be weighted as 1 : 2 : 3, the greatest weight being given to the last year. Calculate the value of Goodwill.

#### Answer:

 Year Profits before charging Salary ( `) Profits after charging Salary ( `) Weights Weighted Profits ( `) 31st March, 2017 1,40,000 1,40,000- 90,000= 50,000 1 50,000 31st March, 2018 1,01,000 1,01,000- 90,000= 11,000 2 22,000 31st March, 2019 1,30,000 1,30,000- 90,000= 40,000 3 1,20,000 Total 6 1,92,000

Weighted Average Profits=Total of Weighted Profits Total Weights= `1,92,000/6= `32,000

Goodwill=Weighted Average Profits × No. of years of Purchase    = `(32,000×4)=  `1,28,000