GNG 2.

0 By RAJAT ARORA SIR

Chapter - 2 Change in Profit Sharing Ratio
Topic – Goodwill

DAY - 7 GNG 2.O By Rajat Arora Sir

Q 1. Varun and Kuber are partners in a business. Balance in capital and current Accounts on 31st
march, 2023 were:

Capital Account Current Account

Varun Rs. 5,00,000 Rs. 80,000

Kuber Rs. 3,50,000 Rs. 20,000

Profits of the last five consecutive years ending 31st March were 2019 Rs. 60,000; 2020 Loss Rs.
40,000; 2021 Rs. 1,30,000; 2022 Rs. 2,00,000 and Rs. 2023 Rs. 2,50,000.

General Reserve appeared in the books at Rs. 50,000

If the normal rate of return is 10%, find the value of goodwill by capitalisation of Average Profit
method.

Q 2. From the following information, calculate goodwill by (i) Capitalisation method and (ii) at 3
year’s purchase of super profits:

i) Total Assets Rs. 10,00,000

ii) External Liabilities Rs. 1,80,000
iii) Normal Rate of Return 10%
iv) Average Net Profit of last five years Rs. 1,00,000

GNG 2.0 By RAJAT ARORA SIR

Q 3. Calculate goodwill of the firm on the basis of 3 year's purchase of the average profits of the last
five years. The profits of the last five years were:

Year Amount (Rs.)

2013-14 4,00,000

2014-15 5,00,000

2015-16 (60,000)

2016-17 1,50,000

2017-18 2,50,000

Additional Information:

1) On 1st January, 2016, a fire broke out which resulted into a loss of goods of Rs. 3,00,000. A
claim of Rs. 70,000 was received from the insurance company.

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2) During the year ended 31st March, 2018 the firm received an unexpected tax refund of Rs.
80,000.

Q 4. Average net profit expected in future by ABC firm is Rs. 36,000 per year. Average capital
employed in the business by the firm is Rs. 2,00,000. The rate of return expected from capital
invested in this class of business is 10%. Remuneration of the partners is estimated to be Rs. 6,000
p.a. Find out the value of goodwill on the basis of two years' purchase of super profit.

Q 5. On 1st April, 2023 an existing firm had assets of Rs. 2,00,000 including cash of Rs. 4,000. Its
creditors amounted to Rs.10,000 on that date. The partner's capital accounts showed a balance of
Rs. 1,60,000 while the general reserve amounted to Rs. 30,000. If the normal rate of return is 15%
and the goodwill of the firm is valued at Rs. 36,000 at 3 year's purchase of super profit, find the
average profits of the firm.

Q 6. It was agreed to calculate the value of goodwill of a firm at three year's purchase of the
weighted average profits of the past four years. The appropriate weights to be used to each year
ended on 31st March are : 2021 - 1, 2022 - 2, 2023 - 3, 2024 - 4.
The profits for these years ended on 31st March are : 2021 Rs. 20,200, 2022 - Rs. 24,800, 2023 Rs.
20,000, and 2024 Rs. 30,000.
On a scrutiny of the accounts the following matters are revealed :-
(i) On 1st December, 2022 a major repair was made in respect of the plant incurring Rs. 6,000 which
amount was charged to revenue. The paid sum is agreed to be capitalised for goodwill calculation
subject to adjustment of depreciation of 10% p.a. on reducing balance method.
(ii) The closing stock for the year ending on 31st March 2022 was over-valued by Rs. 2,400.
(iii) To cover management cost an annual charge of Rs. 4,800 should be made for the purpose of
goodwill valuation.
Compute the value of goodwill.

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Answer key
Ans 1. Average Profits = 60,000 – 40,000 + 1,30,000 + 2,00,000 + 2,50,000/ 5

= 1,20,000

Capitalised value of Average Profits = Average Profits x 100/ Normal rate of return

= 1,20,000 x 100/ 10 = 12,00,000

Capital Employed = Capital Accounts + Current Accounts + General Reserves

= 5,00,000 + 3,50,000 + 80,000 – 20,000 + 50,000

= 9,60,000

Goodwill = Capitalised value of Average profits = Capital Employed

= Rs. 12,00,000 – 9,60,000 = 2,40,000

Ans 2. Goodwill as per Capitalisation Method:

Capital Employed (Net Assets) = Total Assets – External Liabilities

= Rs. 10,00,000 – Rs. 1,80,000 = Rs. 8,20,00

Normal Profit = 10% of Rs. 8,20,000 = Rs. 82,000

Super Profit = Average Profit – Normal profit

= Rs. 1,00,000 – Rs. 82,000 = Rs. 18,000

Goodwill = Super Profit x 100/ Normal Rate of Return

= 18,000 x 100/10 = Rs. 1,80,000

ii) Goodwill as per 3 year’s Purchase of Super profits:

Goodwill = Super Profit x Number of Year’s Purchased

= Rs. 18,000 x 3 = Rs. 54,000

Ans 3. Total profits of last 5 years:

2013-14 4,00,000

2014-15 5,00,000

2015-16 (- Rs. 60,000 + Abnormal Loss Rs. 2,30,000) 1,70,000

2016-17 1,50,000

2017-18 (Rs. 2,50,000 – Abnormal Gain Rs. 80,000) 1,70,000

13,90,000

Average profit = Rs. 13,90,000 / 5 = Rs. 2,78,000

Goodwill = Average Profit x Number of year’s purchase

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= Rs. 2,78,000 x 3 = Rs. 8,34,00 0

Ans 4. i) Actual Average Profit: Rs. 36,000 – Rs. 6,000 = 30,000

ii) Normal profit = Capital Invested x Normal Rate of Return / 100 = 2,00,000 x 10/100 Rs.
20,000
iii) Super profit = Actual Average profit - Normal profit
= Rs. 30,000 – Rs. 20,000 = Rs. 10,000

iv) Value of goodwill = Super Profit x No. of Year’s Purchased

= Rs. 10,000 x 2 = Rs. 20,000

Ans 5. Goodwill = Super Profits x 3 year’s Purchase

36,000 = Super profits x 3

Super Profits = 36,000/3 = Rs. 12,000

Capital Employed = Assets – Creditors

= Rs. 2,00,000 – Rs. 10,000 = Rs. 1,90,000

Normal profits = Capital Employed x Normal Rate of Return / 100

Rs. 1,90,000 x 15/100 = Rs. 28,500

Super profits = Average profits – Normal profits

Hence, Average profits = Super profits + Normal Profits

= 12,000 + Rs. 28,500 = Rs. 40,500

Ans 6. Calculation of Adjusted profits

Year Ending 31.3.2021 31.3.2022 31.3.2023 31.3.2024

Profits 20,200 24,800 20,000 30,000
Less: Change for Management Cost 4,800 4,800 4,800 4,800
15,400 20,000 15,200 25,200
Add: Capital expenditure charged to revenue ------- --------- 6,000 ---------
15,400 20,000 21,200 25,200
Less: Depreciation (not provided) -------- -------- 200 580
15,400 20,000 21,000 24,620
Less: Over valuation of closing stock -------- 2,400 -------- -------
15,400 17,600 21,000 24,620
Add: Over valuation of opening stock --------- --------- 2,400 -------
15,400 17,600 23,400 24,620
Adjusted profits

Calculation of Weighted Average Profits

Year Ending Profits Weights Products

31.3.2021 15,400 1 15,400

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31.3.2022 17,600 2 35,200

31.3.2023 23,400 3 70,200

31.3. 2024 24,620 4 98,480

2,19,280

Weighted Average profits = 2,19,280/ 10 = 21,928

Goodwill at 3 year’s purchase Rs. 21,928 x 3 = Rs. 65,784

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GNG 2.0 Rajat Arora Sir

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