Volume-1 | Chapter- 3 | | Question: 6 to 10 | Ts grewal solution 2019-20

Page No 3.29:

Question 6:

Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2019 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, 2019	2,88,000;
31st March, 2018	1,81,800;
31st March, 2017	1,87,200;
31st March, 2016	2,53,200.

Calculate the value of goodwill.

Answer:

Average Profits of Previous three years= 2,88,000+1,81,8000+1,87,2003= ` 2,19,000
Average Profits of Previous four years= 2,88,000+1,81,800+1,87,200+2,53,2004= ` 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

Page No 3.29:

Question 7:

Divya purchased Jyoti's business with effect from 1st April, 2019. Profits shown by Jyoti's business for the last three financial years were:

2016-17	:	` 1,00,000 (including an abnormal gain of ` 12,500).
2017-18	:	` 1,25,000 (after charging an abnormal loss of ` 25,000).
2018-19	:	` 1,12,500 (excluding ` 12,500 as insurance premium on firm's property- now to be insured).

Calculate the value of firm's goodwill on the basis of two year's purchase of the average profit of the last three years.

Answer:

Normal Profit for the year 2016-17= (Total Profit - Abnormal Gain)= `1,00,000-12,500= ` 87,500
Normal Profit for the year 2017-18= (Total Profit + Abnormal Loss)= ` 1,25,000+25,000= ` 1,50,000
Normal Profit for the year 2018-19= (Total Profit - Indirect Expenses)= ` 1,12,500-12,500= ` 1,00,000
Average Profits= (Normal Profits for 2016-17)+(Normal Profits for 2017-18)+(Normal Profits for 2018-19)3
Average Profits=87,500+1,50,000+1,00,0003= ` 1,12,500
Goodwill=Average Profits of last three years × No. of years of PurchaseGoodwill= ` 1,12,500×2= ` 2,25,000

Page No 3.29:

Question 8:

Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years' purchase of average profit of last five years. These profits for the year ended 31st March, were:

Year	2015	2016	2017	2018	2019
Profit/(Loss) ( `)	1,50,000	3,50,000	5,00,000	7,10,000	(5,90,000)

On 1st April, 2018, a car costing ` 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. Interest of ` 10,000 on Non-trade Investments is credit to income for the year ended 31st March, 2018 and 2019.
Calculate the value of goodwill after adjusting the above.

Answer:

Normal Profits for the year ended 31st March, 2018:=Total Profits+Purchase of car wrongly debited - Depreciation on Car - Income from Non-trade Investments= `(7,10,000 + 1,00,000 - 25,000 - 10,000)= ` 7,75,000
Normal Profits for the year ended 31st March, 2019:=(Total Loss + Income from Non-Trade Investments)= `(5,90,000 + 10,000)= `6,00,000
Average Profits=Normal Profits from 31st March, 2015 to 31st March,20195
Average Profits= ` 1,50,000+3,50,000+5,00,000+7,75,000+6,00,0005= `2,35,000
Goodwill=Average Profits for last 5 years×No. of years of purchase= `(2,35,000×4)= `9,40,000

Page No 3.29:

Question 9:

Bharat and Bhushan are partners sharing profits in the ratio of 3 : 2. They decided to admit Manu as a partner from 1st April, 2019 on the following terms:
(i) Manu will be given 2/5th share of the profit.
(ii) Goodwill of the firm will be valued at two years' purchase of three years' normal average profit of the firm.
Profits of the previous three years ended 31st March, were:
2019 - Profit ` 30,000 (after debiting loss of stock by fire ` 40,000).
2018 - Loss ` 80,000 (includes voluntary retirement compensation paid ` 1,10,000).
2017 - Profit ` 1,10,000 (including a gain (profit) of ` 30,000 on the sale of fixed assets).
Calculate the value of goodwill.

Answer:

Normal Profits for the year ended 31st March,2019=Total Profits+Loss by fire= `(30,000+40,000)= `70,000
Normal Profits for the year ended 31st March,2018= Total loss - Voluntary retirement Compensation paid= `(80,000 -1,10,000)= `30,000
Normal Profits for the year ended 31st March,2017= `Total Profit-Gain on sale of Fixed Assets= `(1,10,000-30,000)= `80,000
Average Profits=Normal Profits from 31st March,2017 to 31st March,20193=70,000+30,000+80,0003= `60,000
Goodwill=Average Profits for last 3 years × No. of years of purchase= `(60,000×2)= `1,20,000

Page No 3.29:

Question 10:

Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3 : 2. They admit Kanika into partnership for 1/4th share in profit. Kanika brings in her share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2017 - Profit ` 50,000 (including profit on sale of assets ` 5,000).
2018 - Loss ` 20,000 (including loss by fire ` 30,000).
2019 - Profit ` 70,000 (including insurance claim received ` 18,000 and interest on investments and Dividend received ` 8,000).
Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.

Answer:

Normal Profits for the year ended 31st March, 2017=(Total Profits-Profit on Sale of Assets)= `(50,000-5,000)= `45,000
Normal Profits for the year ended 31st March, 2018=(Loss by fire - Total Loss)= `(20,000-30,000)= `10,000
Normal Profit for the year ended 31st March, 2019=(Total Profit - Insurnace Claim Received-Interest on Invetsment -Dividend Received)

= `(70,000-18,000-8,000)= `44,000
Average Profits= `Normal Profits from the year ended 31st March,2017 to 31st March, 20193= `45,000+10,000+44,0003= `33,000
Goodwill=Average Profits for the last three years × No. of years of Purchase= `(33,000×2)= `66,000
Kanika's Share of Goodwill= `66,000×14= `16,500