ICM 12th STANDARD GAUTAM BERY

CHAPTER 3
Goodwill
Test Your Understanding
Select the Best Alternate :
Q1. (A) Goodwill is a fictitious asset
(B) Goodwill is a current asset
(C) Goodwill is a wasting asset
(D) Goodwill is a intangible asset

Q2. The excess amount which the firm can get on selling its assets over and above the
saleable value of its assets is called :
(A) Surplus (B) Super profits
(C) Reserve(D) Goodwill

Q3. The Goodwill of the firm is NOT affected by :

(A) Location of the firm (B) Reputation of firm
(C) Better customer service (D) None of the above

Q4. Weighted average method of calculating goodwill is used when :

(A) Profits are not equal (B) Profits show a trend
(C) Profits are fluctuating (D) None of the above

Q5. Under the capitalisation method, the formula for calculating the goodwill is :
(A) Super profits multiplied by the rate of return
(B) Average profits multiplied by the rate of return
(C) Super profits divided by the rate of return
(D) Average profits divided by the rate of return

Q6. Total Capital employed in the firm is Rs.8,00,000, reasonable rate of return is 15% and
Profit for the year is Rs. 12,00,000. The value of goodwill of the firm as per capitalization
method would be :
(A) Rs. 82,00,000 (B) Rs. 12,00,000
(C) Rs.72,00,000 (D) Rs.42,00,000

Q7. A firm earns Rs. 1,10,000. The normal rate of return is 10%. The assets of the firm
amounted to Rs.11,00,000 and liabilities to Rs. 1,00,000. Value of goodwill by
capitalisation of Average Actual Profits will be :

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(A) Rs.2,00,000 (B) Rs. 10,000

(C) Rs. 5,000 (D) Rs. 1,00,000

Q8. A, B and C are partner sharing profits in the ratio of 1 : 2 : 3. On 1-4-2016 they decided to
share the profits equally. On the date there was a credit balance of Rs. 1,20,000 in their
Profit and Loss Account and a balance of Rs. 1,80,000 in General Reserve Account.
Instead of closing the General Reserve Account and Profit and Loss Account, it is decided
to record an adjustment entry for the same. In the necessary adjustment entry to give effect
to the above arrangement:
(A) Dr. A by Rs.50,000; Cr. B by Rs.50,000
(B) Cr. A by Rs.50,000; Dr. B by Rs.50,000
(C) Dr. A by Rs.50,000; Cr. Cby Rs.50,000
(D) Cr. A by Rs.50,000; Dr. Cby Rs.50,000

Q9. X, Y and Z are partners in a firm sharing profits in the ratio 4:3:2. Their Balance Sheet as
at 31-3-2016 showed a debit balance of Profit & Loss A/c Rs. 1,80,000. From 1-4- 2016
they will share profits equally. In the necessary journal entry to give effect to the above
arrangement when X, Yand Z decided not to close the Profit & Loss Acccount:
(A) Dr. Aby Rs.20,000; Cr. Zby Rs.20,000
(B) Cr. X by Rs.20,000; Dr. Zby Rs.20,000
(C) Dr.Xby Rs.40,000; Cr. Zby Rs.40,000
(D) Cr. X by Rs.40,000; Dr. Zby Rs.40,000

Q10. Any change in the relationship of existing partners which results in an end of the existing
agreement and enforces making of a new agreement is called
(A) Revaluation of partnership.
(B) Reconstitution of partnership.
(C) Realization of partnership.
(D) None of the above.

Q2. (a) A, B and C were in partnership sharing profits in the ratio of 4 : 3 : 1. The partners
agreed to share future profits in the ratio of 5 : 4 : 3. Calculate each partner’s gain or sacrifice
due to change in ratio.
2 1 3
[Ans. A sacrifices , B sacrifices and C gains .]
24 24 24

(b) Mahesh, Naresh and Om were partners sharing profits in the ratio of 2 : 3 : 4. With
effect from 1st April, 2016 they agreed to share profits in the ratio of 1 : 2 : 3. Calculate each
partner’s gain or sacrifice due to change in ratio.
[Ans. Mahesh sacrifices and Om gains 1 th share.]
18
Valuation of Goodwill — Average Profit Method :

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Q3. Calculate Goodwill on the basis of two years’ purchase of average profits of last six
years. Profits are as follows :

Year Rs. Profit/Loss

st
1 60,000 Profit
nd
2 40,000 Loss
rd
3 30,000 Loss
th
4 1,00,000 Profit
th
5 1,70,000 Profit
th
6 2,20,000 Profit

[Ans. Rs. 1,60,000.]

Q4. X purchased the business of Y from 1st April, 2019. For this purpose goodwill is to be
valued at 100% of the average annual profits of the last four years. The profits shown by T s
business for the last four years were :

Year ended Rs.

31st March, 2016 Profit (after debiting loss of stock by fire

” 2017 Loss 1,50,000 Rs. 50,000)

(includes voluntary retirement

” 2018 Profit 1,50,000 compensation paid Rs. 80,000)

” 2019 Profit 2,00,000

Verification of books of accounts revealed the following :

(i) During the year ended 31st March, 2017, a machine got destroyed in accident and
Rs.60,000 was written off as loss in Profit & Loss Account.
(ii) On 1st July 2017, Two Computers costing Rs.40,000 each were purchased and were
debited to Travelling Expenses Account on which depreciation is to be charged @ 10%
p.a. on Straight Line Method.
Calculate the value of goodwill.
[Ans. Goodwill Rs. 1,39,000.]
Hint. Profit for the year ended 31st March 2018 Rs.2,24,000 and for 2019 Rs. 1,92,000.

Q5. A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1. They
decide to take D into partnership for 1/4th share on 1st April, 2017. For this purpose,
goodwill is to be valued at 3 times the average annual profits of theprevious four or five
years whichever is higher. The agreed profits for goodwillpurpose of the past five years are
as follows:

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Year ending on 31st March 2013 Rs.

1,30,000

Year ending on 31 st March 2014 1,20,000

Year ending on 31st March 2015 1,50,000

Year ending on 31 st March 2016 1,10,000

Year ending on 31st March 2017 2,00,000

Calculate the value of Goodwill. [Ans. Goodwill Rs.4,35,000]

Q6. 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 3 year’s purchase of average profits
of last 5 years which were as follows :

Rs.

Year ending on 31st March 2013 60,000 (Profit)

Year ending on 31st March 2014 1,50,000 (Profit)

Year ending on 31st March 2015 20,000 (Loss)

Year ending on 31st March 2016 2,00,000 (Profit)

Year ending on 31st March 2017 1,85,000 (Profit)

On 1st October, 2016 a computer costing Rs.40,000 was purchased and debited to
office expenses account on which depreciation is to be charged @25% p.a. Calculate the
value of goodwill.
[Ans. Goodwill Rs.3,66,000.]
Hint : Adjusted profit of 2017 will be : Rs. 1,85,000 + Rs.40,000 - Depreciation Rs.5,000
=
Rs.2,20,000.

Q7. The profits earned by a firm during the last four years were as follows :

Year ended 31st March Profits (Rs.)

2013 80,000

2014 1,00,000

2015 1,10,000

2016 1,50,000

Calculate the value of goodwill on the basis of three year’s purchase of weighted
average profits. Weights to be used are 1,2, 3 and 4 respectively to the profits for 2013,

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2014, 2015 and 2016.

[Ans. Goodwill Rs.3,63,000.]

Q8. Following information is available about the business of a firm :

(i) Profits : In 2013, Rs.40,000; In 2014, Rs.50,000; In 2015, Rs.60,000, (ii) Nonrecurring
income of Rs. 1,000 is included in the profits of 2014, (iii) Profits of 2013 have been reduced
by Rs.6,000 because goods were destroyed by fire, (iv) Goods have not been insured bu t it
is thought to insure them in future. The insurance premium is estimated at Rs.400 per year,
(v) Reasonable remuneration of the proprietor of business is Rs.6,000 per year, but it has
not been taken into account for calculation of above mentioned profits, (vi) Profits of 2015
include Rs.5,000 income on investment.
Goodwill is agreed to be valued at two year’s purchase of the weighted average profits of
the past three years. The appropriate weights to be used are :—
2013 1; 2014 2; 2015 3.
[Ans. Value of Goodwill Rs.90,200.]

Q9. Calculate the value of goodwill on the basis of three year’s purchase of the weighted
average profits of the last five years. Profits to be weighted 1, 2, 3, 4 and 5, the greatest
weightage to be given to last year. Profits of the last five years were :

Year ended (Rs.)

31st March, 2015 : Profit 80,000

” 2016: Profit 1,05,000(after considering abnormal loss

of Rs.41,500)

” 2017: Loss 20,000(after considering abnormal gain

of Rs.40,000)

” 2018: Profit 1,80,000

2019: Profit 2,00,000

Books of Accounts of the firm revealed that:

(i) Closing Stock as on 31st March, 2015 was overvalued by Rs.40,000.
(ii) Repairs to Machinery Rs.60,000 were wrongly debited to Machinery Account on 1st July,
2017. Depreciation was charged on Machinery @ 20% p.a. on diminishing balance
method.
[Ans. Value of Goodwill Rs.3,60,000.]
Hint : Weighted Profit for the year ended 31st March 2018 Rs.5,16,000 and 2019 Rs. 1
0,51,000.
Super Profit Method :

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Q10. A firm earned profits of Rs.80,000, Rs. 1,00,000, Rs. 1,20,000 and Rs. 1,80,000 during
2010-11, 2011-12, 2012-13 and 2013-14 respectively. The firm has capital investment of
Rs.5,00,000. A fair rate of return on investment is 15% p.a. Calculate goodwill of the firm
based on three years’ purchase of average super profits of last four years. (C.B.S.E.
Sample Question Paper, 2015)
[Ans. Goodwill Rs. 1,35,000]

Q11. Capital invested in a firm is Rs.3,00,000. Normal rate of return is 10%. Average profits
of the firm are Rs.41,000 (after an abnormal loss of Rs.2,000). Calculate goodwill at five
times the super profits.
[Ans. Goodwill Rs.65,000.]

Q12. The average net profits expected in the future by ABC firm are Rs. 1,00,000 per year.
The average capital employed in the business by the firm is 5,00,000. The rate of interest
expected from capital invested in this class of business is 15%. The remuneration of the
Partners is estimated to be Rs. 1 0,000 per annum. Find out the value of Goodwill on the
basis of two year’s purchase of super profits.
[Ans. Rs.30,000.]

Q13. A and B are partners. They admit C for 1th share in profits. For this purpose goodwill is
4
to be valued at three year’s purchase of super profits.
Following information is provided to you :

Rs.

A’s Capital 5,00,000

B’s Capital 4,00,000

General Reserve 1,50,000

Profit & Loss A/c (Cr.) 30,000

Sundry Assets 12,00,000

The normal rate of return is 15% p.a. Average Profits are Rs.2,00,000 per year. You are
required to calculate C’s share of goodwill.
[Ans. C’s share of goodwill Rs.28,500.]
Hint. Sundry Assets will be ignored.

Q14. On 1st April, 2014, a firm had assets of Rs. 1,00,000 excluding stock of Rs.20,000.
Partners’ Capital Accounts showed a balance of Rs.60,000. The current liabilities were Rs.
10,000 and the balance constituted the reserve. If the normal rate of return is 8 %, the
‘Goodwill’ of the firm is valued at Rs.60,000 at four years purchase of super profit, find the
average profit of the firm. (C.B.S.E. 2015, Comptt.)
[Ans. Average Profit Rs.23,800.]
Hint: Capital Employed = Total Assets - Current Liabilities= Rs. 1,20,000-Rs.10,000
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=Rs.1,10,000

Q15. On April 1 st 2015, an existing firm had assets of Rs.5,00,000 including cash of
Rs.20,000. the firm had a General Reserve of Rs.90,000, partner’s capital accounts showed
a balance of Rs.3,80,000 and creditors amounted to Rs.30,000. If the normal rate of return is
20% and the goodwill of the firm is valued at Rs. 64,000 at 4 year’s purchase of super profit,
find the average profits of the firm.
[Ans. Rs. 1, 10,000.]
Capitalisation Method :

Q16. The average profits of a firm is Rs.48,000. The total assets of the firm are Rs.8,00,000.
Value of other liabilities is Rs.5,00,000. Average rate of return in the same business is 12%.
Calculate goodwill from capitalisation of average profits method.
[Ans. Rs. 1,00,000.]
Hint: Capital Employed = Assets - Liabilities.

Q17. Anupma, Pumima and Ruchika are partners in a business. Balances in their Canital
and Current Accounts as on 31st March. 2019 were :

Capital Account Current Account

(Rs.) (Rs.)

Anupma 6,00,000 60,000 (Dr.)

Pumima 5,00,000 30,000 (Dr.)

Ruchika 5,00,000 10,000 (Cr.)

The firm earned an average profit of Rs.2,40,000. If the normal rate of return is 12%, find
the value of goodwill by Capitalisation of Average Profit Method.
[Ans. Value of Goodwill Rs.4,80,000]

Q18. Calculate the value of goodwill according to capitalisation of Super Profits Method in
the previous Q. 16.
[Ans. Rs. 1,00,000]

Q19. The following information relates to a partnership firm :

(a) Profits/Losses for the last six years :
1st year Rs.20,000 Profit 4th year Rs.60,000
Profit
2nd year Rs.60,000 Profit 5th yearRs.50,000
Profit

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3rd year Rs.10,000 Loss 6th year Rs.72,000

Profit
Average Capital Employed is Rs.2,00,000.
(b) Rate of normal profit is 15%.
Find out the value of goodwill on the basis of:
(i) Four year’s purchase of average profits.
(ii) Four year’s purchase of super profits.
(iii) Capitalisation of super profits.
[Ans. (i)On the basis of average profits Rs. 1,68,000
(ii) On the basis of super profits Rs. 48,000
(III) On the basis of capitalisation of super profits Rs. 80,000.]
Accounting Treatment of Goodwill when there is change in the profit sharing ratio of
existing partners
Q20. X and Y were partners sharing profits in the ratio of 2 : 1. With effect from 1st April,
2016, they decided to share profits in the ratio of 3 : 1. For this purpose the goodwill of the
firm is valued at Rs. 1,80,000. Give the necessary journal entry.
[Ans. Debit X by Rs.15,000 and Credit Tby Rs.15,000.]

Q21. A and B are partners sharing profits and losses in the ratio of 3 : 1. It was decided that
with effect from 1st April, 2015 the profit sharing ratio will be 5 : 3. Goodwill is to be valued at
2 year’s purchase of average of 3 year’s profits. The profits for the years ending 31st March
2013, 2014 and 2015 were Rs.36,000, Rs.32,000 and Rs.40,000 respectively.
Pass the necessary journal entry for the treatment of goodwill.
[Ans. Debit B by Rs.9,000 and Credit Λ by Rs.9,000.]

Q22. P, Q and R are partners sharing profits equally. They decided that in future R will get
1/7 share in profits. On the day of change, firm’s Goodwill is valued at Rs.42,000. Give
Journal Entries arising on account of change in profit sharing ratio.
[Ans. Debit P and Q by Rs.4,000 each and credit R by Rs.8,000.]
3 1
Hint.: New Ratios 3 : : P and Q gain 2 each and R sacrifices 4 .
7 7 7 21 21

Q23. A, B and C were partners sharing profits and losses in the ratio of 7 : 3 : 2. From 1st
April 2015, they decided to share profits and losses in the ratio of 8 : 4 : 3. Goodwill is to be
valued at the average of three year’s profits preceding the date of change in profit sharing
ratio. The profits for the years ending 31st March 2012,2013, 2014 and 2015 were
Rs.52,000, Rs.48,000, Rs.60,000 and Rs.90,000 respectively. Give the necessary journal
entry.
[Ans. Value of Goodwill Rs.66,000; Debit B by Rs.1,100 and C by Rs.2,200; Credit A by
Rs.3,300.]
Accounting Treatment of Reserves and Accumulated Profits when there is change in the
profit sharing ratio of existing partners

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