Goodwill In Partnership Accounts

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Questions:

Generic 3

5 x 3 = 15

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

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

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.

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.

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

Generic 2

6 x 2 = 12

What is Annuity?

State any two circumstances under which goodwill of a partnership firm is valued.

What is super profit?

What is goodwill?

10.

The following are the profits of a firm in the last five years:
2014: Rs. 10,000; 2015: Rs. 11,000; 2016: Rs. 12,000; 2017: Rs. 13,000 and 2018: Rs. 14,000
Calculate the value of goodwill at 2 years purchase of average profit of five years.

11.

For the purpose of admitting a new partner, a firm has decided to value its goodwill at 3 years purchase of the average profit of the last 4 years using weighted average method. Profits of the past 4 years and the respective weights are as follows:

Particulars	2015	2016	2017	2018
Profit (Rs.)	20,000	22,000	24,000	28,000
Weight	1	2	3	4

Compute the value of goodwill.

Multiple Choice Question

7 x 1 = 7

12.

Self- generated goodwill should not be shown in the ______________

(a)

journal

(b)

ledger

(c)

balance sheet

(d)

books of accounts

13.

Which of the following method, goodwill is calculated by multiplying the weighted average profit?

(a)

Super profit method

(b)

Annuity

(c)

Weighted average profit method

(d)

All of these

14.

Goodwill helps in earning more profit and attracts more _________

(a)

customers

(b)

producers

(c)

competitors

(d)

suppliers

15.

The total capitalised value of a business is Rs. 1,00,000; assets are Rs. 1,50,000 and liabilities are Rs. 80,000. The value of goodwill as per the capitalisation method will be

(a)

Rs. 40,000

(b)

Rs. 70,000

(c)

Rs. 1,00,000

(d)

Rs. 30,000

16.

When the average profit is Rs. 25,000 and the normal profit is Rs. 15,000, super profit is __________

(a)

Rs. 25,000

(b)

Rs. 5,000

(c)

Rs. 10,000

(d)

Rs. 15,000

17.

Super profit is the difference between

(a)

Capital employed and average profit

(b)

Assets and liabilities

(c)

Average profit and normal profit

(d)

Current year’s profit and average profit

18.

Which of the following statements is true?

(a)

Goodwill is an intangible asset

(b)

Goodwill is a current asset

(c)

Goodwill is a fictitious asset

(d)

Goodwill cannot be acquired

Generic 5

2 x 5 = 10

19.

From the following information, calculate the value of goodwill under annuity method:

(i) Average profit	Rs. 14,000
(ii) Normal Profit	Rs. 4,000
(iii) Normal rate of return	15%
(iv) Years of purchase of goodwill	5

Present value of Rs. 1 for 5 years at 15% per annum as per the annuity table is 3.352.

20.

From the following details, calculate the value of goodwill at 2 years purchase of super profit:
(a) Total assets of a firm are Rs. 5,00,000
(b) The liabilities of the firm are Rs. 2,00,000
(c) Normal rate of return in this class of business is 12.5 %.
(d) Average profit of the firm is Rs. 60,000

Assertion and reason

1 x 2 = 2

21.

Assertion (A): Goodwill is the good name or reputation of the business which brings benefit to the business.
Reason (R): It is an intangible asset as it has no physical existence.
(a) Both (A) and (R) are true and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true and (R) is not the correct explanation of (A).
(c) (A) is true, but (R) is false
(d) (A) is false, but (R) is true

One or Two Words / Correct Statement

2 x 1 = 2

22.

(i) Goodwill acquired by making payment in cash or kind is called acquired or purchased goodwill.
(ii) Weighted average profit method, goodwill is calculated by multiplying the weighted average profit by a certain number of years of purchase.
(iii) Normal profit = Capital employed x Fixed assets
(a) (i) is correct
(b) (i) and (ii) are correct
(c) (ii) and (iii) are correct
(d) (i), (ii) and (iii) are correct

23.

(i) Goodwill is shown under fixed assets in the balance sheet.
(ii) Goodwill is an intangible asset.
(iii) Goodwill helps in earning more profit and attracts more customers.
(a) (i) is correct
(b) (ii) is correct
(c) (i) and (ii) are correct
(d) (i), (ii) and (iii) are correct

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Answers Key:

Generic 3

5 x 3 = 15

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

(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

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	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

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

Generic 2

6 x 2 = 12

Annuity refers to series of uniform cash flow at regular intervals. The table value gives the present value of annuity of rupee one received at the end of every year for a specified number of years.
Annuity factor=\(=\frac { i{ (1+i) }^{ n } }{ { (1+i) }^{ n }-1 } \)
Where, i = interest rate
n = estimated number of yea

i) When there is a change in the profit Sharing ratio.
ii) When a new partner is admitted into a firm.
iii) When an existing partner retires from the firm or when a partner dies.
iv) When a partnership firm is dissolved.

Super profit is the excess of average profit over the normal profit. Average profit is calculated by dividing the total adjusted actual profit of certain number of years by the total number of such years. Normal profit is the profit earned by the similar business, firms under normal conditions.
Normal profit = Capital employed \(\times\) Normal rate of return.
Capital employed = Fixed assets + Current assets - Current liabilities.

Goodwill is the good name or reputation of the business which brings benefit to the business. It enables the business to earn more profit. It is the present value of a firm's future excess earnings. It is an intangible asset as it has no physical existence.

10.

Goodwill = Average profit \(\times\) Number of years of purchase
Average profit \(=\frac{Total\ profit}{Number\ of\ years}\)
\(\frac{10,000+11,000+12,000+13,000+14,000}{5}\)
\(=\frac{60,000}{5}\) = Rs. 12,000
Average profit = Rs. 12,000
Goodwill Average profit \(\times\) Number of years of purchase
12,000 \(\times\) 2 = 24,000
Goodwill = Rs. 24,000

11.

**Calculation of weighted average profit**
Year	Profit (a) Rs.	Weights (b)	Weighted profits (a x b) Rs
2015	20,000	1	20,000
2016	22,000	2	44,000
2017	24,000	3	72,000
2018	28,000	4	1,12,000
Total		10	2,48,000

Weighted average profit = \(\frac { Total\ of\ weighted\ profits }{ Total\ of\ weights } \)
=\(\frac { 2,48,000 }{ 10 } \)=Rs.24,800
Goodwill = Weighted average profit × Number of years of purchase
= 24,800 x 3 = Rs.74,400

Multiple Choice Question

7 x 1 = 7

12.

(d)
books of accounts

13.

14.

(a)
customers

15.

(d)
Rs. 30,000

16.

17.

18.

(a)
Goodwill is an intangible asset

Generic 5

2 x 5 = 10

19.

Super profit = Average profit - Normal profit
= 14,000 - 4,000 = Rs. 10,000
Goodwill = Super profit \(\times\) Value of annuity
= 14,000 \(\times\) 3.352
Goodwill = Rs. 33,520

20.

Goodwill = Super profit \(\times\) Number of years of purchase
Super profit = Average profit - Normal profit
Normal profit = Capital employed \(\times\) Normal rate of return
Capital employed = Fixed asset + Current assets - Current liabilities
5,00,000 - 2,00,000 = Rs. 3,00,000
Normal profit = 3,00,000 x 12.5%
= Rs. 37,500
Super profit = 60,000 - 37,500 = Rs. 22,500
Goodwill = 22,500 \(\times\) 2
= Rs. 45,000