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Goodwill: Nature and Valuation Ts grewal solution volume-1(2023-2024) part-2
Question 21:
On 1st April, 2021, an existing firm had assets of ` 75,000 including cash of ` 5,000. Its creditors amounted to ` 5,000 on that date. The firm had a Reserve of ` 10,000 while Partners' Capital Accounts showed a balance of ` 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at ` 24,000 at four years' purchase of super profit, find average profit per year of the existing firm.
Answer:
Average profit = total profit of past given years/number of years
Capital Employed = Total Assets - Creditors
= 75,000 -5,000 = ` 70,000
Normal Profit = Capital Employed×Rate of return/100
Normal Profit = 70,000×20/100
Normal Profit = 14,000
Goodwill of the firm = ` 24,000
Number of years’ purchase = 4
Goodwill= Super profit × no. of purchases years’
Or, 24,000 = Super Profit / 4
Super Profit =24,000/ 4
Super Profit = 6,000
Average profit = Normal profit + Super profit
20,000=14,000+6,000
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Question 22:
Average profit of a firm during the last few years is `2,00,000 and the normal rate of return in a similar business is 10%. If the goodwill of the firm is `2,50,000 at 4 years' purchase of super profit, find the capital employed by the firm.
Answer:
Goodwill= Super profit × No. of purchases years’
2,50,000=(Average profit–Normal profit)×4 (purchases years’)
2,50,000=(Average profit–Normal profit)×4 (purchases years’)
2,50,000=(2,00,000–Normal profit)×4
Or 250,000/4-2,00,000=-Normal profit
Or Normal profit =1,37,500
Normal rate of return=10%
Capital employed=normal profit ×100/ normal rate of return
=1,37,500×100/10=13,75,000
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Question 23:
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.
Answer:
Average normal profit= (Average Profit + Undervaluation of stock on average basis*)
Average normal profit = `(1,00,000+40,000)= `1,40,000
Capital Employed in the business= `6,30,000
Normal Profits=Capital Employed×Normal Rate of Return/100
Normal Profits= `6,30,000×5/100= `31,500
Super Profits=Average Normal Profits - Normal Profits
Super Profits= `(1,40,000-31,500)= `1,08,500
Super Profits= `1,08,500
Goodwill=Super Profits×No. of years of purchase= `(1,08,500×5)= `5,42,500
Goodwill= `(1,08,500×5)= `5,42,500
*Stock has been taken to be closing stock if nothing is specified in the question
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Question 24:
Average profit earned by a firm is ` 7,50,000 which includes overvaluation of stock of ` 30,000 on an average basis. The capital invested in the business is ` 42,00,000 and the normal tare of return is 15%. Calculate goodwill of the firm on the basis of 3 time the super profit.
Answer:
Average Profit earned by a firm = ` 7,50,000
Overvaluation of Stock = ` 30,000
Average Actual Profit = Average Profit earned by a firm – Overvaluation of Stock
or, Average Actual Profit = 7,50,000 – 30,000 = ` 7,20,000
Normal profit = Capital employed×Rate of return/100
Normal profit = 42,00,000×15/100=6,30,000
Super Profit = Actual Average Profit – Normal Profit
or, Super Profit = 7,20,000 – 6,30,000 = ` 90,000
Goodwill = Super Profit × Number of Times
Goodwill = 90,000 × 3 = ` 2,70,000
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Question 25:
Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st April, 2021. 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:
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.
Answer:
Working Notes:
WN: 1 Calculation of Normal Profits:
WN2: Calculation of Super Profits
Average profit = total profit of past given years / number of years
Average profit =9,90,000/5=1,98,000
Normal profit = Capital employed×Rate of return/100
= 15,00,000×10/100=1,50,000
Super profit = Actual profit - Normal profit
= 1,98,000 – 1,50,000=48,000
WN3: Calculation of Capital Employed
Page No 3.32:
Question 26:
From the following information, calculate value of goodwill of the firm by applying Capitalization Method: Total Capital of the firm `16,00,000.
Normal rate of return 10%. Profit for the year `2,00,000.
Answer:
Goodwill= Capitalised value – Actual capital
Capitalised value of goodwill= profit ×100/ Normal rate of return
Capitalised value of goodwill= 2,00,000×100/ 10=20,00,000
Total Capital = ` 16,00,000
Goodwill=20,00,000-16,00,000=4,00,000
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Question 27:
A firm earns 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 Profit Method.
Answer:
Calculation of Goodwill by Capitalisation of Average Profit Method
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Question 28: A and B were partners in a firm with capitals of `3,00,000 and `2,00,000 respectively. The normal rate of return was 20% and the capitalised value of average profits was `7,50,000. Calculate goodwill of the firm by capitalisation of average profits method. (CBSE 2020 C)
Answer:
Total Actual Capital Employed by A and B is `3,00,000 + `2,00,000= `5,00,000
capitalised value of average profits = `7,50,000
Page No 3.32:
Question 29: Puneet and Tarun are in restaurant business having credit balances in their fixed Capital Accounts as `2,50,000 each. They have credit balances in their Current Accounts of `30,000 and `20,000 respectively. The firm does not have any liability. They are regularly earning profits and their average profit of last 5 years is `1,00,000. if the normal rate of return is 10%, find the value of goodwill by Capitalisation of Average Profit Method.
Answer:
Total Actual Capital Employed = 2,50,000+2,50,000+30,000+20,000
=5,50,000
Capitalised Value of Average profit= Average Profit×100/Rate of Return
= 1,00,000×100/10
=10,00,000
Page No 3.32:
Question 30:
Form the following particulars, calculate value of goodwill of a firm by applying Capitalisation of Average Profit Method:
(i) Profits of last five consecutive years ending 31st March are: 2021 − `54,000; 2020 − `42,000; 2019 − `39,000; 2018 − `67,000 and 2017 − `59,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm ` 2,00,000.
Answer:
Page No 3.32:
Question 31:
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.
Answer:
Average Profit – ` 4,00,000
Normal Rate of Return – 10%
(i) Goodwill by Capitalisation of Super profit
(ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits
Therefore, Goodwill is valued at ` 2,16,000
Page No 3.32:
Question 32: A firm earns profit of `5,00,000. Normal Rate of Return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outsiders' liabilities as on the date of goodwill are `55,00,000 and `14,00,000 respectively. Calculate value of goodwill according to Capitalisation of Super Profit Method as well as Capitalisation of Average Profit Method.
Answer;
Capitalised value of average profit =500,000×100/10=50,00,000
Actual capital employed= Assets – liabilities
=50,00,000-41,00,000
=9,00,000
Normal profit = 41,00,000×10/100
Super profit=5,00,000-4,10,000=90,000
Value of goodwill under super profit method
=90,000×100/10=9,00,000
Page No 3.32:
Question 33:
On 1st April, 2018, a firm had assets of ` 1,00,000 excluding stock of ` 20,000. The current liabilities were ` 10,000 and the balance constituted Partners' Capital Accounts. If the normal rate of return is 8%, the Goodwill of the firm is valued of ` 60,000 at four years' purchase of super profit, find the actual profits of the firm.
Answer:
Total Assets of the firm=(Sundry Assets + Stock)= `(1,00,000+20,000)= `1,20,000
Current Liabilities of the firm= `10,000
Capital Employed=(Total Assets - Current Liabilities)= `(1,20,000 - 10,000)= `1,10,000
Normal Profits=Capital Employed × Normal Rate of Return/100= `1,10,000×8/100= `8,800
Goodwill = Super Profits × No. of years of purchase
60,000= Super Profits × 4
Super Profits= `60,000/4= `15,000
Super Profits= Average Actual Profits - Normal Profits
15,000=Average Actual Profits - 8,800
Average Actual Profits= `(15,000+8,800)= `23,800
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Question 34: Average profit of a firm during the last few years is `1,50,000. In similar business, the normal rate of return is 10% of the capital employed. Calculate the value of goodwill by capitalisation of super profit method if super profits of the firm are `50,000. (CBSE 2020 C)
Answer:
Super Profit = 50,000
Goodwill = Super Profit ×100/Rate of Return
Goodwill = 50,000 ×100/10
Goodwill = 5,00,000
Page No 3.33:
Question 35: Raja Brothers earn an average profit of `30,000 with a capital of `2,00,000. The normal rate of return in the business is 10%. Using capitalisation of super profit method, workout the value of the goodwill of the firm. (NCERT)
Answer:
Calculation of goodwill under capitalization of super profit method
Capital value = Super profit ×100/Rate of return
Normal profit = Capital employed × Rate of return/100
Normal profit = 2,00,000×10/100=20,000
Super profit = 30,000-20,000
Super profit = 10,000
Goodwill= 10,000×100/10=1,00,000
Page No 3.33:
Question 36:
Rajan and Rajani are partners in a firm. Their capitals were Rajan ` 3,00,000; Rajani ` 2,00,000. During the year 31st March, 2021, the firm earned a profit of ` 1,50,000. Calculate the value of goodwill of the firm by capitalisation of super profit assuming that the normal rate of return is 20%.
Answer:
Goodwill=Super Profits×100÷Nominal Rate of Return
Super Profits=Average Profit-Normal Profit
Average Profit= `1,50,000
(Given)Normal Profit=Capital Employed×Normal Rate of Return
Normal Profit=(3,00,000+2,00,000)×20%= `1,00,000
Super Profit=1,50,000-1,00,000= `50,000
Goodwill=50,000×100÷20= ` 2,50,000
Page No 3.33:
Question 37:
Average profit of GS & Co. is ` 50,000 per year. Average capital employed in the business is `3,00,000. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.
Answer:
Working Notes:
WN1: Calculation of Super Profits
Average Profit=Total Profits for past given years÷No. of Years
= ` 50,000
Normal Profit=Capital Employed×Normal Rate of Return÷100
=3,00,000×10÷100= ` 30,000
Super Profit=Average Profit-Normal Profit
=50,000-30,000= ` 20,000
Page No 3.33:
Question 38:
A business has earned average profit of ` 8,00,000 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 profit.
Assets of the business were ` 80,00,000 and its external liabilities ` 14,40,000.
Answer:
Capital Employed=Total Assets - External Liabilities
= `(80,00,000-14,40,000)= `65,60,000
Normal Profits=Capital Employed × Normal Rate of Return÷100
= `65,60,000×10÷100= `6,56,000
Average Profits= `8,00,000
Super Profits=Average Profits - Normal Profits
= `(8,00,000 - 6,56,000)= `1,44,000
(i)As per Capitalisation of Super Profit method,Goodwill=Super Profit×100÷Normal Rate of Return
= `1,44,000×100÷10= `14,40,000 (ii)As per Super Profit method,Goodwill=Super Profit × No. of years of purchase
= `(1,44,000×3)= `4,32,000
Page No 3.33:
Question 39:
From the following information, calculate value of goodwill of the firm:
(i) At three years' purchase of Average Profit.
(ii) At three years' purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average profit.
Information:
(a) Average Capital Employed is ` 6,00,000.
(b) Net Profit÷(Loss) of the firm for the last three years ended are:
31st March, 2021 − ` 2,00,000, 31st March, 2020 − ` 1,80,000, and 31st March, 2019 − ` 1,60,000.
(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of ` 1,00,000 to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) is ` 7,00,000 whereas Partners' Capital is ` 6,00,000 and Outside Liabilities ` 1,00,000.
Answer:
Working Notes:
WN1: Calculation of Average and Super Profits
Average Profit=Total Profits of past years given÷No. of Years
=2,00,000+1,80,000+1,60,000÷3
= ` 1,80,000,
Average Profit (Adjusted) = ` 1,80,000 - 1,00,000 (Remuneration to partners)
= ` 80,000Normal Profit=Capital Employed×Normal Rate of Return÷100
=6,00,000×10÷100= ` 60,000
Super Profit=Average Profit (Adjusted)-Normal Profit
=80,000-60,000= ` 20,000
WN2: Calculation of Capital Employed
Capital Employed=Total Assets-Outside Liabilities
=7,00,000-1,00,000
= ` 6,00,000