Advertisements
Advertisements
Question
Average profit earned by a firm is ₹ 1,00,000 which includes undervaluation of stock of ₹ 40,000 on an average basis. The capital invested in the business is ₹ 6,30,000 and the normal rate of return is 5%. Calculate goodwill of the firm on the basis of 5 times the super profit.
Solution
Average normal Profit = (Average Profit + Undervaluation of stock on average basis*)
= Rs. ( 1,00,000 + 40,000) = Rs. 1,40,000
Capital Employed in the business = Rs. 6,30,000
Normal Profits = `( "Capital Employed" xx "Normal Rate of Return"/100)`
= Rs. ( 6,30,000 x `5/100`) = Rs. 31,500
Super Profits = Average Normal Profits - Normal Profits
= Rs. ( 1,40,000 - 31,500) = Rs. 1,08,500
Goodwill = Super Profits x No. of Years of purchase
= Rs. ( 1,08,500 x 5) = Rs. 5,42,500
* Stock has been taken to be closing stock if nothing is specified in the question.
APPEARS IN
RELATED QUESTIONS
Goodwill is to be valued at three years' purchase of four years' average profit. Profits for last four years ending on 31st March of the firm were:
2016 − ₹ 12,000; 2017 − ₹ 18,000; 2018 − ₹ 16,000; 2019 − ₹ 14,000.
Calculate amount of Goodwill.
Calculate the value of firm's goodwill on the basis of one and half years' purchase of the average profit of the last three years. The profit for first year was ₹ 1,00,000, profit for the second year was twice the profit of the first year and for the third year profit was one and half times of the profit of the second year.
Purav and Purvi are partners in a firm, sharing profits and losses in the ratio of 2 : 1. They decide to take Parv into partnership for 1/4th share on 1st April, 2019. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years are:
| Year | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 |
| Profits (₹) | 14,000 | 15,500 | 10,000 | 16,000 | 15,000 |
Calculate the value of goodwill.
Abhay, Babu, and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years' purchase of the average profit of the last five years. These profits for the year ended 31st March were:
| Year | 2015 | 2016 | 2017 | 2018 | 2019 |
| Profit/(Loss) (₹) | 1,50,000 | 3,50,000 | 5,00,000 | 7,10,000 | (5,90,000) |
On 1st April 2018, a car costing ₹ 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. The interest of ₹ 10,000 on Non-trade Investments is a credit to income for the year ended 31st March 2018 and 2019.
Calculate the value of goodwill after adjusting the above.
Gupta and Bose had a firm in which they had invested ₹ 50,000. On an average, the profits were ₹ 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years' purchase of profits in excess of profits @ 15% on the money invested. Calculate the value goodwill.
Average net profit expected in future by XYZ firm is ₹ 36,000 per year. Average capital employed in the business by the firm is ₹ 2,00,000. The normal rate of return from capital invested in this class of business is 10%. Remuneration of the partners is estimated to be ₹ 6,000 p.a. Calculate the value of goodwill on the basis of two years' purchase of super profit.
A partnership firm earned net profits during the last three years ended 31st March, as follows: 2017 − ₹ 17,000; 2018 − ₹ 20,000; 2019 − ₹ 23,000.
The capital investment in the firm throughout the above-mentioned period has been ₹ 80,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the above-mentioned three years.
A partnership firm earned net profits during the past three years as follows:
| Year ended | 31st March, 2019 | 31st March, 2018 | 31st March, 2017 |
| Net Profit (₹) | 2,30,000 | 2,00,000 | 1,70,000 |
Capital investment in the firm throughout the above-mentioned period has been ₹ 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of the partners during this period is estimated to be ₹ 1,00,000 p.a.
Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the above-mentioned three year
Ideal Marketing earned an average profit of ₹ 4,00,000 during the last five years. Normal rate of return on capital employed is 10%. Balance Sheet of the firm as at 31st March, 2019 was as follows:
| Liabilities | Amount (₹) |
Assets | Amount (₹) |
|
| Capital A/cs: | Land and Building | 10,00,000 | ||
| Shyam | 5,00,000 | Furniture | 2,00,000 | |
| Sunder | 5,00,000 | 10,00,000 | Investments | 1,00,000 |
| Current A/cs: | Sundry Debtors | 5,00,000 | ||
| Shyam | 2,00,000 | Bills Receivable | 50,000 | |
| Sunder | 2,00,000 | 4,00,000 | Closing Stock | 3,00,000 |
| Reserves | 3,40,000 | Cash in Hand | 50,000 | |
| Sundry Creditors | 4,00,000 | Cash at Bank | 1,00,000 | |
| Bills Payable | 1,00,000 | |||
| Outstanding Expenses | 60,000 | |||
| 23,00,000 | | 23,00,000 | ||
Calculate the value of goodwill, if it is valued at three years' purchase of Super Profit.
A business has earned average profit of ₹ 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are ₹ 10,00,000 and its external liabilities are ₹ 1,80,000. The normal rate of return is 10%.
From the following information, calculate value of goodwill of the firm by applying Capitalisation Method: Total Capital of the firm ₹ 16,00,000.
Normal rate of return 10%. Profit for the year ₹ 2,00,000.
Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st April, 2019. They agreed to value goodwill at 3 years' purchase of Super Profit Method for which they decided to average profit of last 5 years. The profits for the last 5 years were:
| Year Ended | Net Profit (₹) | |
| 31st March, 2015 | 1,50,000 | |
| 31st March, 2016 | 1,80,000 | |
| 31st March, 2017 | 1,00,000 | (Including abnormal loss of ₹ 1,00,000) |
| 31st March, 2018 | 2,60,000 | (Including abnormal gain (profit) of ₹ 40,000) |
| 31st March, 2019 | 2,40,000 |
The firm has total assets of ₹ 20,00,000 and Outside Liabilities of ₹ 5,00,000 as on that date. Normal Rate of Return in similar business is 10%. Calculate value of goodwill.
A business has earned average profit of ₹ 4,00,000 during the last few years and the normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method, and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profits.
Assets of the business were ₹ 40,00,000 and its external liabilities ₹ 7,20,000.
A firm earned an average profit of ₹ 3,00,000 during the last few years. The normal rate of return of the industry is 15%. The assets of the business were ₹ 17,00,000 and its liabilities were ₹ 2,00,000. Calculate the goodwill of the firm by capitalisation of average profits.
Identify the incorrect pair
The following are the profits of a firm in the last five years:
2014: ₹ 10,000; 2015: ₹ 11,000; 2016: ₹ 12,000; 2017: ₹ 13,000 and 2018: ₹ 14,000
Calculate the value of goodwill at 2 years purchase of average profit of five years.
From the following information, calculate the value of goodwill on the basis of 3 years purchase of average profits of last four years.
| Year | Result | Amount (₹) |
| 2015 | Profit | 5,000 |
| 2016 | Profit | 8,000 |
| 2017 | Loss | 3,000 |
| 2018 | Profit | 6,000 |
What is super profit?
What is the need for the valuation of goodwill?
