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Questions:

Generic 3

11 x 3 = 33

From the following information, find out the value of goodwill by capitalisation method:
(i) Average profit Rs. 20,000
(ii) Normal rate of return 10%
(iii) Capital employed Rs. 1,50,000

A partnership firm earned net profits during the last three years as follows:
2016 : Rs. 20,000; 2017 : Rs. 17,000 and 2018 : Rs. 23,000
The capital investment of the firm throughout the above mentioned period has been Rs. 80,000. Having regard to the risk involved, 15% is considered to be a fair return on capital employed in the business. Calculate the value of goodwill on the basis of 2 years purchase of super profit.

Find out the value of goodwill at three years purchase of weighted average profit of last four year.

Year	Profit Rs.	Weight
2015	10,000	1
2016	12,000	2
2017	16,000	3
2018	18,000	4

Purchase of super profit method.

How is the value of goodwill calculated under the capitalisation method?

How is goodwill calculated under the super profits method?

From the following information relating to Sridevi enterprises, calculate the value of goodwill on the basis of 4 years purchase of the average profits of 3 years.
(a) Profits for the years ending 31st December 2016, 2017 and 2018 were Rs. 1,75,000, Rs. 1,50,000 and Rs. 2,00,000 respectively.
(b) A non-recurring income of Rs. 45,000 is included in the profits of the year 2016.
(c) The closing stock of the year 2017 was overvalued by Rs. 30,000.

From the following information relating to a partnership firm, find out the value of its goodwill based on 3 years purchase of average profits of the last 4 years:
(a) Profits of the years 2015, 2016, 2017 and 2018 are Rs. 10,000, Rs. 12,500, Rs. 12,000 and Rs. 11,500 respectively.
(b) The business was looked after by a partner and his fair remuneration amounts to Rs. 1,500 per year. This amount was not considered in the calculation of the above profits.

The following particulars are available in respect of a business carried on by a partnership firm:
(a) Profits earned: 2016: Rs. 30,000; 2017: Rs. 29,000 and 2018: Rs. 32,000.
(b) Profit of 2016 includes a non-recurring income of Rs. 3,000.
(c) Profit of 2017 is reduced by Rs. 2,000 due to stock destroyed by fire.
(d) The stock is not insured. But, it is decided to insure the stock in future. The insurance premium is estimated at Rs. 5,600 per annum.
You are required to calculate the value of goodwill on the basis of 2 years purchase of average profits of the last three years.

From the following information relating to Arul enterprises, calculate the value of goodwill on the basis of 2 years purchase of the average profits of 3 years.
(a) Profits for the years ending 31^st December 2016, 2017 and 2018 were Rs. 46,000, Rs. 44,000 and Rs. 50,000 respectively.
(b) A non-recurring income of Rs. 5,000 is included in the profits of the year 2016.
(c) The closing stock of the year 2017 was overvalued by Rs. 10,000.

10.

A partnership firm has decided to value its goodwill for the purpose of settling a retiring partner. The profits of that firm for the last four years were as follows:
2015: Rs. 40,000; 2016: Rs. 50,000; 2017: Rs. 48,000 and 2018: Rs. 46,000
The business was looked after by a partner. No remuneration was paid to him. The fair remuneration of the partner valued at comes to Rs. 6,000 per annum.
Find out the value of goodwill, if it is valued on the basis of three years purchase of the average profits of the last four years

11.

The profits and losses of a firm for the last four years were as follows:
2015: Rs. 15,000; 2016: Rs. 17,000; 2017: Rs. 6,000 (Loss); 2018: Rs. 14,000
You are required to calculate the amount of goodwill on the basis of 5 years purchase of average profits of the last 4 years.

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Answers Key:

Generic 3

11 x 3 = 33

Capitalised value of the business = \(\frac{Average\ profit}{Normal\ rate\ of\ return}\times100\)
= \(\frac{20,000}{10}\times100\)
= Rs. 2,00,000
Capital employed = Fixed assets (excluding goodwill) + Current assets - Current Liabilities
Capital employed = Tangible assets of the firm - Liabilities of the firm
Net tangible assets = 2,20,000 - 70,000 = Rs. 1,50,000
Goodwill = Total capitalised value of the average profit - Capital employed
= 2,00,000 - 1,50,000
= Rs. 50,000

Average profit \(=\frac{Total\ profit}{Number\ of\ years}\)
\(=\frac{20,000+17,000+23,000}{3}\)
\(=\frac{60,000}{3}\) = Rs.20,000
Normal profit = Capital employed x Normal rate of return
80,000 \(\times\) 15% = Rs. 12,000
Super profit = Average profit - Normal profit
20,000 - 12,000 = Rs. 8,000
Goodwill = Super profit \(\times\) Number of years of purchase
= 8,000 \(\times\) 2 = Rs.16,000
Goodwill = Rs. 16,000

Calculation of weighted average profit
Year	Profits(a) Rs.	Weight(b)	Weighted profit (axb) Rs.
2015	10,000	1	10,000
2016	12,000	2	24,000
2017	16,000	3	48,000
2018	18,000	4	72,000
Total		10	1,54,000

Weighted average profit = \(\frac{Total\ of\ weighted\ profit}{Total\ of\ weights}\)
=\(\frac{1,54,000}{10}=Rs.15,400\)

Weighted average profit = 15,400
Goodwill = Weighted average profit \(\times\) Number of years of purchase
= 15,400 \(\times\) 3 = 46,200
Goodwill = Rs. 46,200

(i) Under this method, goodwill is the excess of capitalised value of average profit of the business over the actual capital employed in the business.
Goodwill = Total capitalised value of the business - Actual capital employed
(ii) The total capitalised value of the business is calculated by capitalising the average profits on the basis of the normal rate of return.
Capitalised value of the business
\(=\frac{Average\ profit}{Normal\ rate of\ return}\times 100\)
(iii) Actual capital employed = Fixed assets (excluding goodwill ) + Current assets - Current liabilities

a. Purchase of super profit method.
Goodwill is calculated by multiplying the super profit by a certain number of years of purchase.
Goodwill Super profit \(\times\) No. of years of purchase.
b. Annuity method: value of Goodwill is calculated by multiplying the super profit with the present of Value of annuity.
Goodwill super profit \(\times\) Present value annuity factor.
c. Capitalisation of super profit method:
Goodwill = \(\frac{Super\ profit}{ Normal\ rate\ of\ return} \times 100\)

Calculation of adjusted profit
Particulars	2016 Rs.	2017 Rs.	2018 Rs.
Profit	1,75,000	1,50,000	2,00,000
Less: Non - recurring-income	45,000	-	-
	1,30,000	1,50,000	2,00,000
Less: Over valuation of closing stock	-	30,000	-
	1,30,000	1,20,000	2,00,000
Add: Over valuation of Opening stock	-	-	30,000
Profit after adjustments	1,30,000	1,20,000	2,30,000

Average profit \(=\frac{Total\ profit}{Number\ of\ years}\)
\(=\frac{1,30,000+1,20,000+2,30,000}{3}\)
\(=\frac{4,80,000}{3}\) = Rs. 1,60,000
Goodwill = Average profit \(\times\) Number of years of purchase
= 1,60,000 \(\times\) 4
= Rs. 6,40,000

Average profit \(=\frac{Total\ profit}{Number\ of\ years}\)
\(=\frac{10,000+12,000+12,000+11,500}{4}\)
\(=\frac{46,000}{4}\) = Rs.11,500

Average profit before adjusting fair remuneration of the parter	= Rs. 11,500
Less: Fair remuneration of partners	= Rs. 1,500
Average profit	= Rs. 10,000

Goodwill Average profit \(\times\) Number of years of purchase
= 10,000 \(\times\) 3
= Rs. 30,000
Goodwill = Rs. 30,000

**Calculation of adjusted profit**
Particulars	2016 Rs.	2017 Rs.	2018 Rs.
Profit	30,000	29,000	32,000
Less: Non- recurring income	3,000	-	-
	27,000	29,000	32,000
Add: Stock destroyed by fire (abnormal loss)	-	2,000	32,000
Profit after adjustments	27,000	31,000	32,000

Average profit = \(\frac { Total\ profit }{ Number\ of\ year } \)
Average profit = \(\frac { 27,000+31,000+32,000 }{ 3 } \)
= \(\frac { 90,000 }{ 3 } \) = Rs. 30,000

Particulars	Rs.
Average profit before adjusting insurance premium payable	30,000
Less: Insurance premium payable in future	5,600
Average profit	24,400

Goodwill = Average profit \(\times\) Number of years of purchase
= 24,400 \(\times\) 2
= Rs. 48,800

**Calculation of adjusted profit**
Particulars	2016 Rs.	2017 Rs.	2018 Rs.
Profit	46,000	44,000	50,000
Less: Non- recurring income	5,000	-	-
	41,000	44,000	50,000
Less: Over valuation of closing stock	-	10,000	-
	41,000	34,000	50,000
Add: Over valuation of opening stock	-	-	10,000
Profit after adjustments	41,000	34,000	60,000

Tutorial note: Over valuation of closing stock in 2017 will result in over valuation of opening stock in 2018.
Average profit = \(\frac { Total\ profit }{ Number\ of\ year } \)
= \(\frac { 41,000+34,000+60,000 }{ 3 } \)
= \(\frac { 1,35,000 }{ 3 } \) = Rs. 42,000
Goodwill = Average profit \(\times\) Number of years of purchase
= 45,000 × 2
= Rs. 90,000

10.

Average profit = \(\frac { Total\quad profit }{ Number\quad ofyear } \)
= \(\frac { 40,000+50,000+48,000+46,000 }{ 4 } \)
= \(\frac { 1,84,000 }{ 4 } \)
= Rs. 46,000

Average profit before adjusting fair remuneration of the partner	Rs. 46,000
Less: Fair remuneration of partners	6,000
Average profit	40,000

Goodwill = Average profit \(\times\) Number of years of purchase
= 40,000 \(\times\) 3 = Rs. 1,20,000

11.

Goodwill = Average profit × Number of years of purchase
Average profit = \(\frac { Total\ profit }{ Number\ ofyear } \)
Average profit = \(\frac { 15,000+17,000-6,000+14,000 }{ 4 } \)
= \(\frac { 40,000 }{ 4 } \) = Rs. 10,000
Goodwill = Average profit \(\times\) Number of years of purchase
= 10,000 × 5 = Rs. 50,000