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Question
Geet and Meet are partners in a firm. They admit Jeet into partnership for equal share. It was agreed that goodwill will be valued at three years' purchase of average profit of last five years. Profits for the last five years were:
| Year Ended | 31st March, 2015 | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 |
| Profits (₹) | 90,000 (Loss) |
1,60,000 | 1,50,000 | 65,000 | 1,77,000 |
Books of Account of the firm revealed that:
(i) The firm had gain (profit) of ₹ 50,000 from sale of machinery sold in the year ended 31st March, 2016. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of ₹ 20,000 incurred in the year ended 31st March, 2017 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2017 amounting to ₹ 1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.
Calculate the value of goodwill.
Solution
|
Particulars |
Year |
31st Mar., 2015 |
31st Mar., 2016 |
31st Mar., 2017 |
31st Mar., 2018 |
31st Mar., 2019 |
|
Profit/Loss |
(90,000) |
1,60,000 |
1,50,000 |
65,000 |
1,77,000 |
|
|
Less: Gain on Sale of Machinery |
|
50,000 |
|
|
|
|
|
Add: Abnormal Loss |
|
|
20,000 |
|
|
|
|
Add: Overhaul of existing machinery |
|
|
|
|
|
|
|
Debited to Repairs A/c |
|
|
|
1,00,000 |
|
|
|
Less: Depreciation @20% p.a. |
|
|
|
15,000 |
17,000 |
|
|
Normal Profit/Loss |
(90,000) |
1,10,000 |
1,70,000 |
1,50,000 |
1,60,000 |
|
Average Profits = `("Normal Profit for the year ended 31st March,2015 to 31st March,2019"/5)`
= `([ -90,000 + 1,10,000 + 170,000 + 150,000 + 160,000 ]/5)`
= Rs. 1,00,000
Goodwill = Average Profits of last three years x No. of Years of Purchase
Goodwill = Rs.( 1,00,000 x 3) = Rs. 3,00,000
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| Liabilities |
Amount (₹) |
Assets | Amount (₹) |
|
| Capital A/cs: | Furniture | 4,00,000 | ||
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| Cash in Hand | 50,000 | |||
| Cash at Bank | 2,00,000 | |||
| Deferred Revenue Expenditure: | ||||
| Advertisement Suspense | 50,000 | |||
| 19,50,000 | 19,50,000 | |||
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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.
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You are required to calculate the value of goodwill of the firm on the basis of 2 years purchase of average profits of the last three years.
Find out the value of goodwill at three years purchase of weighted average profit of last four years.
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Weight |
| 2015 | 10,000 | 1 |
| 2016 | 12,000 | 2 |
| 2017 | 16,000 | 3 |
| 2018 | 18,000 | 4 |
A partnership firm earned net profits during the last three years as follows:
2016: ₹ 20,000; 2017: ₹ 17,000 and 2018: ₹ 23,000
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From the following information, calculate the value of goodwill under the annuity method:
| Particulars | ₹ |
| Average profit | 14,000 |
| Normal Profit | 4,000 |
| Normal rate of return | 15% |
| Years of purchase of goodwill | 5 |
Present value of ₹ 1 for 5 years at 15% per annum as per the annuity table is 3.352
How is the value of goodwill calculated under the capitalisation method?
Compute average profit from the following information.
2016: ₹ 8,000; 2017: ₹ 10,000; 2018: ₹ 9,000
When we use the super profit method for goodwill Valuation:
What are the methods of valuation of goodwill?
The following steps are of which method of goodwill:
- Calculate the average profit.
- Calculate the normal profit on the capital employed on the basis of the normal rate of return.
- Calculate the super-profits by deducting normal profit from the average profits, and
- Calculate goodwill by multiplying the super-profits by the given number of years' purchase.
Identify the formula for calculating goodwill with the help of the Average Profit Method.
