GSEB Class 12 Accounts Solutions Chapter 3 Valuation of Goodwill

 

Question 1. Select the correct answer for each questions:
(1) 'Goodwill' is which type of asset ?
(A) Tangible asset
(B) Intangible asset
(C) Current asset
(D) Fictitious asset
Answer: (B) Intangible asset
In simple words: Goodwill is a non-physical asset representing the value of a company's reputation and customer loyalty.
🎯 Exam Tip: Understanding asset classifications (tangible vs. intangible) is crucial for accounting principles, particularly for balance sheet presentation.

 

Question 1. Select the correct answer for each questions:
(2) Goodwill depends on which aspect ?
(A) On employee of business enterprise
(B) On management of business enterprise
(C) On future maintainable profit
(D) On future maintainable profit
Answer: (D) On future maintainable profit
In simple words: The value of goodwill is primarily linked to the business's ability to generate consistent profits in the future.
🎯 Exam Tip: Future maintainable profit is a key determinant for goodwill valuation, reflecting the business's sustainable earning capacity.

 

Question 1. Select the correct answer for each questions:
(3) Goodwill is a financial value of ...................
(A) Investment
(B) prestige of business enterprise
(C) fixed assets
(D) competition
Answer: (B) prestige of business enterprise
In simple words: Goodwill represents the monetary worth derived from a business's reputation and market standing.
🎯 Exam Tip: Remember that goodwill reflects the qualitative aspects of a business, like its brand and customer trust, translated into a financial value.

 

Question 1. Select the correct answer for each questions:
(4) Goodwill is ................... where individual skill is important.
(A) more
(B) less
(C) zero
(D) negative
Answer: (B) less
In simple words: When a business heavily relies on the unique skills of an individual, its transferable goodwill is generally lower because that value may not persist if the individual leaves.
🎯 Exam Tip: The transferability and sustainability of a business's earning capacity, independent of specific individuals, directly impact goodwill valuation.

 

Question 1. Select the correct answer for each questions:
(5) Which method is appropriate for the computation of goodwill when every year profit is increasing ?
(A) simple average
(B) weighted average
(C) annual growth rate
(D) compound growth rate
Answer: (B) weighted average
In simple words: The weighted average method is best suited for goodwill calculation when profits show a consistent upward trend, giving more importance to recent, higher profits.
🎯 Exam Tip: Selecting the correct valuation method based on profit trends (increasing, decreasing, or fluctuating) is essential for accurate goodwill assessment.

 

Question 1. Select the correct answer for each questions:
(6) Expected profit = ...................
(A) Capital employed × Expected rate of return
(B) Average profit × Expected rate of return
(C) Weighted average × Expected rate of return
(D) Assets × Expected rate of return
Answer: (A) Capital employed × Expected rate of return
In simple words: Expected profit is calculated by multiplying the capital invested in the business by the normal rate of return anticipated in that industry.
🎯 Exam Tip: This formula is fundamental for determining the normal profit a business should earn, which is a baseline for super profit calculation.

 

Question 1. Select the correct answer for each questions:
(7) Super profit means ...................
(A) Capital employed – Expected profit
(B) Expected profit – Capital employed
(C) Average profit – Expected profit
(D) Expected profit – Average profit
Answer: (C) Average profit – Expected profit
In simple words: Super profit is the amount by which a firm's actual average profit exceeds the normal or expected profit for a business of its size and industry.
🎯 Exam Tip: Super profit is a critical component in goodwill valuation as it represents the extra earning capacity beyond normal returns.

 

Question 2. Answer the following questions in one sentence :
(1) What is goodwill ?
Answer: Goodwill is an intangible asset representing the firm's market reputation, or alternatively, the monetary value of a firm's superior profit-earning capacity compared to expected profits.
In simple words: Goodwill is the value of a business's good name and the extra profit it can earn beyond normal expectations.
🎯 Exam Tip: A concise definition of goodwill, covering both its nature as an intangible asset and its link to excess earnings, is important.

 

Question 2. Answer the following questions in one sentence :
(2) What is revaluation of goodwill?
Answer: During the reconstruction of a partnership, when assets and liabilities are re-evaluated, the determination of a new goodwill value is termed as revaluation of goodwill.
In simple words: Revaluation of goodwill means calculating its value again, typically when a partnership undergoes changes.
🎯 Exam Tip: Revaluation of goodwill is common during changes in partnership structure, such as admission, retirement, or change in profit-sharing ratios.

 

Question 2. Answer the following questions in one sentence :
(3) Which type of asset is goodwill?
Answer: Goodwill is an intangible asset that, while not physically visible, possesses market value.
In simple words: Goodwill is an intangible asset, meaning it's not a physical item but still has monetary worth.
🎯 Exam Tip: Classifying goodwill as an intangible asset helps distinguish it from physical or current assets in financial statements.

 

Question 2. Answer the following questions in one sentence :
(4) Under which head goodwill is shown in the balance sheet ?
Answer: Goodwill is presented on the assets side of the balance sheet under the non-current assets category as an intangible asset.
In simple words: Goodwill appears on the assets side of the balance sheet as an intangible, non-current asset.
🎯 Exam Tip: Proper balance sheet classification of goodwill under non-current intangible assets is a standard accounting practice.

 

Question 2. Answer the following questions in one sentence :
(5) What is capitalized profit ?
Answer: Capitalized profit refers to the capitalized value of the average profit, determined based on the expected rate of return.
In simple words: Capitalized profit is the total capital required to earn a company's average profit, given a normal rate of return.
🎯 Exam Tip: Capitalized profit is a key concept for calculating goodwill using the capitalization method, as it helps determine the total value of the business based on its earnings.

 

Question 2. Answer the following questions in one sentence :
(6) What is super profit ?
Answer: When a business generates earnings in excess of its average profit, this surplus amount is designated as super profit.
In simple words: Super profit is the extra profit a business earns above what it normally should.
🎯 Exam Tip: Understanding super profit is crucial as it directly contributes to the value of goodwill, indicating superior earning capacity.

 

Question 2. Answer the following questions in one sentence :
(7) What is average profit ?
Answer: Average profit is the value obtained when the total profit accumulated over several past years is divided by the corresponding number of years.
In simple words: Average profit is the sum of a business's profits over a few years, divided by the number of those years.
🎯 Exam Tip: Average profit serves as a baseline for comparison with expected profit when calculating super profit and goodwill.

 

Question 2. Answer the following questions in one sentence :
(8) What is weighted average profit ?
Answer: Weighted average profit is determined by assigning weights (e.g., 1, 2, 3...) to the profits of recent years and then calculating the average based on these weights.
In simple words: Weighted average profit gives more importance to recent profits by multiplying them with increasing weights before averaging.
🎯 Exam Tip: The weighted average method is particularly useful when profit trends are consistently increasing or decreasing, providing a more realistic average.

 

Question 3. Answer the following questions :
(1) Give the meaning of goodwill and explain the factors affecting to its valuation.
Answer: Goodwill is an intangible asset that reflects a firm's market reputation. Factors influencing its valuation include:
(i) Nature of business: A firm consistently achieving higher profits due to stable sales, other specific advantages, or high-value-added products often possesses significant goodwill.
(ii) Location of business: A business situated in a central or high-traffic area tends to attract more customers and generate higher profits, leading to a greater goodwill value.
(iii) Period of business: Generally, older, well-established firms enjoy higher market reputations. Their long-standing customer relationships and familiarity contribute to a higher goodwill value.
(iv) Market situation: Businesses operating under monopoly conditions or with limited competition can achieve higher profits, thereby increasing their goodwill.
(v) Efficiency of managers: Effective management enhances productivity and reduces costs, leading to increased profitability and, consequently, higher goodwill.
(vi) Other special benefits: Firms that acquire licenses, patents, or trademarks, or consistently earn superior profits due to factors like excellent after-sales service or strong labor relations, tend to have very high goodwill.
In simple words: Goodwill is the value of a business's good name. Its worth is affected by things like what kind of business it is, where it's located, how old it is, the market conditions, how well it's managed, and any special advantages it holds.
🎯 Exam Tip: When discussing goodwill, ensure to cover both its definition as an intangible asset and a comprehensive list of internal and external factors that can influence its value.

 

Question 3. Answer the following questions :
(2) Explain the nature of the goodwill.
Answer: At the time of a partnership firm's reconstruction, assets and liabilities are re-evaluated, which also involves determining the value of goodwill.
(i) Goodwill is an intangible asset for a business, categorized under non-current assets.
(ii) Though intangible and not visible, goodwill holds market value over time. A reputable, well-established business develops advantages such as a strong brand name, positive reputation, and extensive business connections, which ultimately benefit its operations. The monetary value of these advantages forms the primary basis of goodwill.
(iii) Goodwill does not exist in businesses that only earn normal profit or incur losses.
(iv) Goodwill is presented on the assets side of the balance sheet within the non-current assets section as an intangible asset.
In simple words: Goodwill is an invisible asset tied to a business's reputation and earning power, shown on the balance sheet, and only exists if the business makes more than normal profits.
🎯 Exam Tip: When describing the nature of goodwill, emphasize its intangible character, its link to excess earnings, and its presentation in financial statements.

 

Question 3. Answer the following questions :
(3) Explain the simple average method for the valuation of goodwill.
Answer: In the simple average profit method for goodwill valuation, the average profit of a specified number of past years is considered. This average profit is then multiplied by a predetermined number of purchase years for goodwill. This method assumes that a new business would require a certain number of years to achieve the same profit level. Therefore, the buyer is willing to pay goodwill equivalent to a multiple of the average profit.
Generally, goodwill is calculated as the product of the average profit and the number of years for which this anticipated profit is expected.

Illustration: A firm's profits for the last four years were Rs. 40,000, Rs. 45,000, Rs. 35,000, and Rs. 60,000, respectively. The goodwill is to be determined based on a 3-year purchase of the average profit from these last four years.
Total profit = Rs. 40,000 + Rs. 45,000 + Rs. 35,000 + Rs. 60,000 = Rs. 1,80,000
\[ \text{Average profit} = \frac{\text{Total Profit of given years}}{\text{Number of years}} \]
Average profit = Rs. 1,80,000 / 4 = Rs. 45,000
Goodwill = Average profit × No. of years of purchase
Goodwill = Rs. 45,000 × 3 = Rs. 1,35,000
In simple words: The simple average method calculates goodwill by averaging past profits and then multiplying this average by a set number of years of purchase, representing future benefit.
🎯 Exam Tip: This method is suitable when profits are stable or show no clear trend. Ensure all historical profits are summed correctly before dividing by the number of years.

 

Question 3. Answer the following questions :
(4) Explain the weighted average method for the valuation of goodwill.
Answer: In the weighted average profit method, if there's a continuous increase or decrease in profits, greater weight is assigned to the profits of more recent years, and comparatively less weight is given to earlier years' profits. Typically, weights such as 1, 2, 3, etc., are assigned to profits of different years.
After multiplying the profit by its respective weight, a weighted average profit is calculated. This method is used when there's a specific instruction or a clear trend (increasing or decreasing) in the business's profits.

Illustration: A firm's profits for the last 3 years were Rs. 22,000, Rs. 25,000, and Rs. 30,000, respectively. Determine the value of goodwill based on a 2-year purchase of the last 3 years' weighted average profit.

Year	Profit (Rs.)	Weight	Weighted Profit (Rs.)
1	22,000	1	22,000
2	25,000	2	50,000
3	30,000	3	90,000
Total		6	1,62,000

\[ \text{Weighted average profit} = \frac{\text{Total Weighted Profit}}{\text{Total Weight}} \]
\[ \text{Weighted average profit} = \frac{1,62,000}{6} \]
\[ \text{Weighted average profit} = 27,000 \]
Goodwill = Weighted average profit × No. of years of purchase
Goodwill = Rs. 27,000 × 2 = Rs. 54,000
In simple words: The weighted average method values goodwill by giving more importance (weight) to recent profits, averaging these weighted profits, and then multiplying by the number of purchase years.
🎯 Exam Tip: This method is preferred when there's a clear trend in profits. Ensure the correct weights are applied and the calculation is precise.

 

Question 3. Answer the following questions :
(5) Explain the super profit method for the valuation of goodwill.
Answer: For valuing goodwill using the super profit method, several factors are considered: the capital employed by the business, the expected rate of return, the expected profit, and the average profit.
Super profit is defined as the excess of average profit over the expected profit. It signifies the additional profit a business earns above what is normally anticipated.
When calculating goodwill based on the super profit method, these key steps and considerations should be kept in mind:
Capital Employed = Total Assets – Total External Liabilities.
The expected rate of return is typically provided.
Expected profit = \( \frac{\text{Capital Employed} \times \text{Expected rate of return}}{100} \)
Average profit is taken after necessary adjustments.
Super profit = Average profit – Expected profit
Goodwill = Super profit × No. of years of purchase

Illustration: Determine the valuation of goodwill based on a 3-year purchase of super profit, using the following information for a firm: Total Assets Rs. 14,00,000; Total Liabilities Rs. 5,00,000; Expected rate of return 10%.
Profits: 2013-14: Rs. 1,30,000; 2014-15: Rs. 2,20,000; 2015-16: Rs. 1,80,000; 2016-17: Rs. 1,50,000.

Statement showing computation of Goodwill

1.	Capital Employed: Total Assets - Total Liabilities = 14,00,000 - 5,00,000	9,00,000
2.	Expected rate of return	10 %
3.	Expected profit = Capital Employed × Expected rate of return = 9,00,000 × 10%	90,000
4.	Average Profit :
Year 2013-14 2014-15 2015-16 2016-17 Total Profit (Rs.) 1,30,000 2,20,000 1,80,000 1,50,000 6,80,000
	Average Profit = Total Profit / No. of years = 6,80,000 / 4	1,70,000
5.	Super Profit = Average Profit - Expected Profit = 1,70,000 - 90,000	80,000
6.	Goodwill = Super profit × No. of years of purchase = 80,000 × 3	2,40,000

In simple words: The super profit method values goodwill by first finding the extra profit a business earns above normal expectations, then multiplying this extra profit by a specific number of purchase years.
🎯 Exam Tip: Accurately calculating capital employed and expected profit is fundamental for determining super profit, which directly impacts the goodwill value.

 

Question 3. Answer the following questions :
(6) Explain the profit capitalization method for the valuation of goodwill.
Answer: In the capitalization of profit method, the business's average profit is computed and then converted into its capitalized value. This conversion is based on the normal or expected rate of return for the business, and the resulting value is known as capitalized profit.
Capitalized profit refers to the capitalized value of the average profit, determined by applying the expected rate of return.
\[ \text{Capitalized profit} = \frac{\text{Average Profit}}{\text{Expected rate of return %}} \times 100 \]
Goodwill = Capitalized profit – Capital employed
If the capitalized amount is equal to or less than the capital employed, then no goodwill exists for the business.

Illustration: Determine the goodwill value using the average profit capitalization method, given the following information for a firm: Total Assets Rs. 10,00,000; Total liabilities Rs. 2,00,000; Expected rate of return 10%. The profits for the last three years are Rs. 1,10,000, Rs. 1,30,000, and Rs. 1,20,000, respectively.

Statement showing computation of Goodwill

1.	Capital Employed: Total Assets - Total Liabilities = 10,00,000 - 2,00,000	8,00,000
2.	Expected rate of return	10 %
3.	Average Profit = Total Profit / No. of years = 3,60,000 / 3	1,20,000
4.	Capitalised Profit = (Average Profit / Expected Rate of return) × 100 = (1,20,000 / 10) × 100	12,00,000
5.	Goodwill = Capitalised profit - Capital Employed = 12,00,000 - 8,00,000	4,00,000

In simple words: The capitalization of profit method calculates goodwill by converting the average profit into the total capital that *should* be employed at a normal return rate, then subtracting the actual capital employed.
🎯 Exam Tip: Ensure a clear distinction between 'capitalized profit' (the notional capital based on earnings) and 'capital employed' (the actual capital invested) for accurate goodwill calculation.

 

Question 4. From the following information of Bhavesh and Vipul's firm, compute the value of goodwill on the basis of 4 years purchase of last five years average profit. Information of last five years profit is as under :

Year	2011-12	2012-13	2013-14	2014-15	2015-16
Profit (Rs.)	1,00,000	1,10,000	1,80,000	2,00,000	1,50,000

Answer:
Statement showing computation of average profit :

Year	Profit (Rs.)
2011-12	1,00,000
2012-13	1,10,000
2013-14	1,80,000
2014-15	2,00,000
2015-16	1,50,000
Total	7,40,000

\[ \text{Average profit} = \frac{\text{Total Profit}}{\text{No. of years}} \]
\[ \text{Average profit} = \frac{7,40,000}{5} = 1,48,000 \]
Goodwill = Average profit × No. of years purchased
Goodwill = Rs. 1,48,000 × 4 = Rs. 5,92,000
In simple words: First, sum up all the profits for the five years and divide by five to get the average profit. Then, multiply this average profit by four (years of purchase) to find the goodwill.
🎯 Exam Tip: Double-check the total profit and the number of years used for calculating the average to avoid errors. The years of purchase is a direct multiplier, not the number of profit years.

 

Question 5. Mahendra and Pravin are partners of a firm sharing profit and loss in the ratio of 3 : 2. They want to change their profit-loss sharing ratio to 1 : 1. Therefore, they decided to make valuation of goodwill. As per partnership agreement, value of goodwill to be determine on the basis of 5 years purchase of last 4 years average profit.

Year	2013-14	2014-15	2015-16	2016-17
Profit (Rs.)	60,000	80,000	(20,000)	30,000

Answer:
Statement showing computation of average profit :

Year	Profit (Rs.)
2013-14	60,000
2014-15	80,000
2015-16	(20,000)
2016-17	30,000
Total	1,50,000

Note : Amount mentioned in bracket () indicates loss.
\[ \text{Average profit} = \frac{\text{Total Profit}}{\text{No. of years}} \]
\[ \text{Average profit} = \frac{1,50,000}{4} = 37,500 \]
Goodwill = Average profit × No. of years of purchased
Goodwill = Rs. 37,500 × 5 = Rs. 1,87,500
In simple words: Sum the profits and losses for the four years to find the total profit, then divide by four for the average. Multiply this average by five (years of purchase) to calculate the goodwill.
🎯 Exam Tip: When calculating average profit, correctly account for losses (negative values) in the total profit summation.

 

Question 6. From the following information find out weighted average profit.

Year	2013-14	2014-15	2015-16	2016-17
Profit (Rs.)	60,000	70,000	90,000	1,10,000

Answer:
Statement showing computation of weighted profit :

Year	Profit (Rs.)	Weight	Product (Weighted Profit)
2013-14	60,000	1	60,000
2014-15	70,000	2	1,40,000
2015-16	90,000	3	2,70,000
2016-17	1,10,000	4	4,40,000
Total		10	9,10,000

\[ \text{Weighted Average Profit} = \frac{\text{Total weighted profit}}{\text{Total weight}} \]
\[ \text{Weighted Average Profit} = \frac{9,10,000}{10} = 91,000 \]
In simple words: To find the weighted average profit, multiply each year's profit by its assigned weight, sum these products, and then divide by the total of the weights.
🎯 Exam Tip: Always assign increasing weights to later years' profits when the trend is increasing, and ensure accurate summation of both weights and weighted profits.

 

Question 7. From the following information of Babulal and Kantilal's firm, determine the value of goodwill on the basis of 3 years purchase of last five years weighted average profit :

Year	2012-13	2013-14	2014-15	2015-16	2016-17
Profit (Rs.)	40,000	60,000	75,000	90,000	1,20,000

Answer:
Statement showing computation of Weighted Profit :

Year	Profit (Rs.)	Weight	Product (Weighted Profit)
2012-13	40,000	1	40,000
2013-14	60,000	2	1,20,000
2014-15	75,000	3	2,25,000
2015-16	90,000	4	3,60,000
2016-17	1,20,000	5	6,00,000
Total		15	13,45,000

\[ \text{Weighted average profit} = \frac{\text{Total weighted profit}}{\text{Total weight}} \]
\[ \text{Weighted average profit} = \frac{13,45,000}{15} \]
\[ \text{Weighted average profit} = 89,666.67 \text{ or } 89,667 \]
Goodwill = Weighted average profit × No. of years of purchase
Goodwill = Rs. 89,666.67 × 3 = Rs. 2,69,000
In simple words: Calculate the weighted average profit by multiplying each year's profit by its weight, summing these weighted profits, and dividing by the total weights. Then, multiply this weighted average by three (years of purchase) to find the goodwill.
🎯 Exam Tip: Pay close attention to the number of years for which profits are given and the specified number of years for purchase, as these are distinct values.

 

Question 8. Pushapa, Pratibha and Bhavna are partners of a partnership firm. They decided to change their profit-loss sharing ratio from 3: 2 : 1 to 1 : 1 : 1. Therefore they decided to make the valuation of goodwill. On the basis of partnership firm's profit and other information, determine the value of goodwill on the basis of three years purchase of super profit. Assets : Rs. 6,00,000; Liabilities : Rs. 2,50,000; Expected rate of return : 10% Actual Profit:

Year	Profit (Rs.)
2014-15	80,000
2015-16	70,000
2016-17	90,000

Answer:
Statement showing computation of Goodwill

Step No.	Particulars	Amount (Rs.)
(1)	Capital Employed : Total Assets Less: Total Liabilities	6,00,000 2,50,000 -------------- 3,50,000
(2)	Expected rate of return	10%
(3)	Expected profit = Capital employed × Expected rate of return = 3,50,000 × 10%	35,000
(4)	Average profit :
Year Profit (Rs.) 2014-15 80,000 2015-16 70,000 2016-17 90,000 Total 2,40,000
	Average profit = Total Profit / No. of years = 2,40,000 / 3	80,000
(5)	Super profit = Average profit - Expected profit = 80,000 - 35,000	45,000
(6)	Goodwill = Super profit × No. of years of purchase = 45,000 × 3	1,35,000

In simple words: First, calculate the capital employed and the expected profit. Then, find the average of the actual profits and subtract the expected profit to get the super profit. Finally, multiply this super profit by the years of purchase to determine goodwill.
🎯 Exam Tip: Accurately calculating capital employed is the first critical step. Ensure the expected rate of return is correctly applied to find the expected profit before calculating super profit.

 

Question 9. Capital of Meena and Manju's firm is Rs. 4,00,000 and expected rate of return is 10%. Last three year's profits are Rs. 1,20,000, Rs. 1,10,000 and Rs. 1,00,000 respectively. Compute the value of goodwill two times of super profit on the basis weighted average method.
Answer:
Statement showing computation of Goodwill

Step No.	Particulars	Amount (Rs.)
(1)	Capital Employed	4,00,000
(2)	Expected rate of return	10%
(3)	Expected profit = Capital employed × Expected rate of return = 4,00,000 × 10%	40,000
(4)	Weighted average profit :
Year Profit (Rs.) Weight Weighted Profit (Rs.) 1 1,20,000 1 1,20,000 2 1,10,000 2 2,20,000 3 1,00,000 3 3,00,000 Total 6 6,40,000
	Weighted Average Profit = Total weighted profit / Total weight = 6,40,000 / 6	1,06,667
(5)	Super profit = Average profit - Expected profit = 1,06,667 - 40,000	66,667
(6)	Goodwill = Super profit × No. of years of purchase = 66,667 × 2	1,33,334

In simple words: First, calculate the expected profit based on capital employed. Then, determine the weighted average of actual profits. Subtract the expected profit from the weighted average profit to find the super profit, and multiply this super profit by two (years of purchase) to get the goodwill.
🎯 Exam Tip: When using the weighted average for super profit calculation, ensure the profits are weighted correctly, especially if they are decreasing, to get an accurate average for comparison with expected profit.

 

Question 10. From the following information of Nairutva and Rutvik's firm determine the value of goodwill of partnership firm on the basis of capitalization of weighted average profit method. Additional information : (1) Business assets : Rs. 6,00,000. (2) Business liabilities : Rs. 1,70,000. (3)Normal expected return of business is 10%.

Year	2012-13	2013-14	2014-15	2015-16	2016-17
Profit (Rs.)	45,000	50,000	65,000	75,000	90,000

Answer:
Statement showing computation of Goodwill

Step No.	Particulars	Amount (Rs.)
(1)	Capital Employed : Total Assets Less: Total Liabilities Net Assets/Capital Employed	6,00,000 1,70,000 -------------- 4,30,000
(2)	Expected rate of return	10%
(3)	Weighted average profit :
Year Profit (Rs.) Weight Weighted Profit (Rs.) 2012-13 45,000 1 45,000 2013-14 50,000 2 1,00,000 2014-15 65,000 3 1,95,000 2015-16 75,000 4 3,00,000 2016-17 90,000 5 4,50,000 Total 15 10,90,000
	Weighted average profit = Total weighted profit / Total weight = 10,90,000 / 15	72,667
(4)	Capitalized profit = (Average Profit / Expected rate of return) × 100 = (72,667 / 10) × 100	7,26,670
(5)	Goodwill = Capitalized profit - Capital employed = 7,26,670 - 4,30,000	2,96,670

In simple words: Calculate capital employed, then the weighted average profit. Use the weighted average profit and expected return rate to find the capitalized value of the firm. Finally, subtract the capital employed from this capitalized value to determine goodwill.
🎯 Exam Tip: When using the capitalization method with weighted average profit, ensure the calculation of total weighted profit and the subsequent weighted average is accurate, as any error will propagate through the entire goodwill calculation.

 

Question 11. Determine the value of goodwill of Prabha and Prabhu's firm on the basis of capitalized super profit method. (1) Capital employed : Rs. 9,00,000 (2) Expected rate of return : 12 % (3) Last five years profit :

Year	2012-13	2013-14	2014-15	2015-16	2016-17
Profit (Rs.)	1,00,000	1,40,000	1,30,000	1,50,000	1,80,000

Answer:
Statement showing computation of Goodwill

Step No.	Particulars	Amount (Rs.)
(1)	Capital Employed	9,00,000
(2)	Expected rate of return	12%
(3)	Expected profit = Capital employed × Expected rate of return = 9,00,000 × 12%	1,08,000
(4)	Average profit :
Year Profit (Rs.) 2012-13 1,00,000 2013-14 1,40,000 2014-15 1,30,000 2015-16 1,50,000 2016-17 1,80,000 Total 7,00,000
	Average profit = Total Profit / No. of years = 7,00,000 / 5	1,40,000
(5)	Super profit = Average profit - Expected profit = 1,40,000 - 1,08,000	32,000
(6)	Goodwill = Super profit / Expected rate of return = 32,000 / 12%	2,66,667

In simple words: First, calculate the expected profit based on capital employed. Then, find the average of the actual profits and subtract the expected profit to get the super profit. Finally, divide this super profit by the expected rate of return (as a percentage) to determine the capitalized goodwill.
🎯 Exam Tip: This method capitalizes the *super profit*, not the average profit. Ensure that the super profit is correctly divided by the *expected rate of return* for capitalization, not multiplied by years of purchase.

Question 12. Rajesh and Harish are partners in a firm. Based on the firm's profits and other data, calculate the goodwill using the two-year purchase of super profit method. (1) Capital employed: Rs. 8,00,000 (2) Expected rate of return: 12 % (3) Profits for previous years:

Year	Profit (Rs.)
2014-15	1,20,000
2015-16	90,000
2016-17	1,50,000

Answer:Statement showing computation of Goodwill

Step No.	Particulars	Amount (Rs.)
(1)	Capital Employed	8,00,000
(2)	Expected rate of return	12%
(3)	Expected profit = Capital employed × Expected rate of return = 8,00,000 × 12% = 96,000	96,000
(4)	Average profit: Year Profit(Rs.) 2014-15 1,20,000 2015-16 90,000 2016-17 1,50,000 Total 3,60,000 Average profit = \( \frac{\text{Total Profit}}{\text{No. of years}} \) = \( \frac{3,60,000}{3} \) = 1,20,000	1,20,000
(5)	Super profit = Average profit - Expected profit = 1,20,000 - 96,000 = Rs. 24,000	24,000
(6)	Goodwill = Super profit × No. of years of purchase = 24,000 × 2 = Rs. 48,000	48,000

In simple words: This calculation determines goodwill by finding the extra profit a business earns above the normal expectation. It involves first calculating the expected profit based on capital employed, then the average actual profit, and finally the difference, known as super profit, which is then multiplied by a specified number of years.

🎯 Exam Tip: When computing goodwill using the super profit method, ensure correct calculation of both expected profit and average profit. The number of purchase years is a critical multiplier for the final goodwill value.