Goodwill : Nature & Valuation
1 Goodwill of a firm is valued at two years’ purchase of average profits of the last five years. The profits are 2017 Rs.80,000; 2016 Rs.60,000; 2015 Rs.10,000; 2014 Rs.20,000; 2013 Rs.50,000. Calculate the average profit and goodwill of the firm.
(Ans : Goodwill Rs.88,000)
2 The goodwill of a firm is valued at three years’ purchase of the average profits of the last five years. The profits are 2017 Rs.80,000; 2016 Rs.60,000; 2015 Rs.10,000; 2014 Rs.20,000 (Loss); 2013 Rs. 50,000. Calculate the average profit and goodwill of the firm.
(Ans : Goodwill Rs.1,08,000)
3 Monu purchased Sonu’s business from 1st January 2014. The profits disclosed by Sonu’s business for the last three years were as follows:
2013 Rs.30,000 (including an abnormal gain of Rs.5,000)
2014 Rs.40,000 (after charging an abnormal loss of Rs.10,000)
2015 Rs.35,000 (excluding Rs.5,000 as insurance premium of firm’s property now insured)
Calculate the goodwill on the basis of the two year’s purchase of the average profit for the last three years.
(Ans : Goodwill Rs.70,000)
4 The following were the profits of the firm for the last three years.
2017 Rs.4,00,000 (including an abnormal gain of Rs.1,50,000)
2016 Rs.3,00,000 (after charging an abnormal loss of Rs.2,00,000)
2015 Rs.5,00,000 (excluding Rs.2,00,000 payable on insurance of plant and machine)
Calculate the value of the firm’s goodwill on the basis of four year’s purchase of average profits of the last three years.)
(Ans : Goodwill Rs.14,00,000)
5 A, B and C are partners sharing profits and losses equally. They agree to admit D for equal share. For this purpose, goodwill is to be valued at four years’ purchase of average profit of last five years. Profits for the past five years were:

On 1st April, 2017, 5 cycles costing Rs.20,000 were purchased and were wrongly debited to Travelling Expenses. Depreciation on cycles was to be charged @25%. Calculate value of goodwill.
(Ans: Goodwill Rs.1,88,000)
6 The profits of a firm for the year ended 31st March for the last five years were as follows : 2009 Rs.20,000; 2010 Rs.30,000; 2011 Rs.40,000; 2012 Rs.50,000; 2013 Rs.55,000. Calculate the value of goodwill on the basis of three year’s purchase of weighted average profits after weights 1,2,3,4,5 respectively to the profits for 2009, 2010, 2011, 2012, 2013.
(Ans : Goodwill Rs. 1,35,000)
7 Calculate the goodwill of a firm on the basis of three years’ purchase of the weighted average profit of the last four years. Profits for these four years ended 31st March were:

The weights assigned to each year ended 31st March are: 2012-1; 2013-2; 2014-3; 2015-4.
You are provided with the following additional information:
(i)On 31st March, 2014, a major plant repair was undertaken for Rs.12,000 which was charged to revenue. The said sum is to be capitalized for goodwill calculation subject to adjustment of depreciation of 10% p.a. on Reducing Balance Method.
(ii)The Closing Stock for the year ended 31st March, 2013 was overvalued by Rs.4,800.
(iii)To cover management cost an annual charge of Rs.9,600 should be made for the purpose of goodwill valuation.
(Ans: Goodwill Rs. 1,31,880)
8 A firm earned net profits during the last three years as 1st year Rs.18,000; 2nd year Rs.20,000 and 3rd year Rs. 22,000. The capital investment of the firm is Rs.60,000. A fair return on capital having regard to the risk involved @10%. Calculate the value of goodwill on the basis of three years’ purchase of the average profits for the last three years.
(Ans : Goodwill Rs.42,000)
9 The average net profits Yajur Ltd. expected in the future are Rs.54,000 per year. The average capital employed in the business is Rs.2,00,000. The rate of interest expected from capital invested in this class of business is 10%. The remuneration of partners is estimated to be Rs.10,000 p.a. Find out the value of goodwill on the basis of three years’ purchase of super profits.
(Ans : Goodwill Rs.72,000)
10 Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs.3,00,000; Rajani Rs.2,00,000. During the year 2012 the firm earned a profit of Rs.1,50,000. Calculate the value of goodwill of the firm assuming that the normal rate of return is 20%.
(Ans : Goodwill Rs.2,50,000)
11 On April 1, 2013 an existing firm had assets of Rs.75,000 including cash of Rs.5,000. The partner’s capital accounts showed a balance of Rs.60,000 and reserve constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at Rs.21,000 at three years’ purchase of super profits, find average profit of the firm.
(Ans : Average Profit Rs.14,500)
12 (a)A firm had Rs.2,40,000 worth of fixed assets and Rs.1,60,000 as current assets on 1st January, 2014. On that date creditors of the firm were Rs.40,000 partner’s capital Rs.3,40,000 and general reserve Rs.20,000. If the goodwill of the firm is valued at Rs.40,000 on the basis of four years purchase of super profit on the basis of 10% return on capital employed. Find out the average profit of the firm.
(Ans: Average Profit Rs.56,000)
(a)A firm earns Rs.15,000 as its annual profit, the rate of normal profit being 10%. The asset of the firm amounted to Rs.70,000. The value of goodwill is Rs.40,000 calculated on 4 years of purchase of super profit. Find the value of outside liabilities.
(Ans : Liabilities Rs.20,000)
13 The average profit earned by a firm is Rs.2,50,000 which includes overvaluation of stock of Rs.10,000 on an average basis. The capital invested in the business is Rs.14,00,000 and th normal rate of return is 15%.
Calculate goodwill of the firm on the basis of 4 times the super profit.
(Ans: Goodwill Rs.1,20,000)
14 M/s H&M India has assets of Rs.5,00,000 whereas liabilities are : Partners’ Capitals- Rs.3,50,000, General Reserve- Rs.60,000 and Sundry Creditors- Rs.90,000. If normal rate of return is 10% and goodwill of the firm is valued at Rs.90,000 at 2 years’ purchase of super profit, find the average profit of the firm.
(Ans : Average Profit Rs.86,000)
15 A business has earned average profit of Rs.1,00,000 during the last few years. Find out the value of goodwill by capitalization method, given that the assets of business are Rs.10,00,000 and its external liabilities are Rs.1,80,000. The normal rate of return is 10%.
(Ans : Goodwill Rs.1,80,000)
16 The following information relates to a partnership firm. The profit (2013) Rs.80,000; profit (2014) Rs.1,00,000; profit (2015) Rs.2,00,000; profit (2016) Rs.1,50,000; profit (2017) Rs.2,70,000. The average capital employed is Rs.5,00,000; rate of normal profit is 20%. Find the value of goodwill under the following.
(a)On the basis of three years’ purchase of average profit.
(b)Three years’ purchase of super profit, and
(c)Capitalisation of super profit.
(Ans: (a)Goodwill Rs.4,80,000; (b)Goodwill Rs.1,80,000; (c)Goodwill Rs.3,00,000)
17 From the figures given below, calculate goodwill according the capitalization of average profit method. Actual Average Profit is Rs.72,000. Normal Rate of Return is 10%, while assets are Rs.9,70,000 and liabilities Rs.4,00,000.
(Ans : Goodwill Rs. 1,50,000
18 Priyam and Kiran are in restaurant business having credit balance in their fixed capital accounts as Rs.2,50,000 each. They have credit balances in their current accounts of Rs.30,000 and Rs.20,000 respectively. The firm does not have any liability. They are regularly earning profit and their average profits of last five years is Rs.1,00,000. If the normal rate of return is 10%, find the value of goodwill by capitalization of Average Profit Method.
(Ans : Goodwill Rs. 4,50,000)
19 L and M are partners in a firm. Their capitals are: L Rs.3,00,000 and M Rs.2,00,000. During the year ended 31st March, 2010 the firm earned a profit of Rs.1,50,000. Assuming that the normal rate of return is 20%, calculate the value of goodwill of the firm.
(i)By Capitalization Method; and
(ii)By Super Profit Method if the goodwill is valued at 2 years’ purchase of super profit.
(Ans : (i)Goodwill Rs. 2,50,000 and (ii)Goodwill Rs.1,00,000)
20 Average profit of the firm is Rs.1,50,000. Total tangible assets in the firm are Rs.14,00,000 and outside liabilities are Rs.4,00,000. In the same type of business, the normal rate of return is 10% of capital employed.
Calculate value of goodwill by capitalization of super profit method.
(Ans: Goodwill Rs.5,00,000)
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