Page 61 - DEBKVOL-1

Chapter 3 Goodwill: Nature and Valuation 3.3
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Solved Questions

Illustration 1.
Brick, Sand and Cement were in partnership sharing profits and losses in the ratio of 5 : 3 : 2.
They decide to take Lime into partnership from 1st April, 2019. For this purpose, Goodwill is
to be valued at 80% of the average annual profits of the previous three or four years, whichever
is higher.
The profits were: `
Year ended 31st March, 2018 48,000
Year ended 31st March, 2017 30,000
Year ended 31st March, 2016 31,500
Year ended 31st March, 2015 45,000
Calculate the value of Goodwill.

Solution:
CALCULATION OF AVERAGE PROFIT
Based on 3 years’ profits ` Based on 4 years’ profits `
Year ended 31st March, 2018 48,000 Year ended 31st March, 2018 48,000
Year ended on 31st March, 2017 30,000 Year ended 31st March, 2017 30,000
Year ended on 31st March, 2016 31,500 Year ended 31st March, 2016 31,500
Year ended 31st March, 2015 45,000
1,09,500 1,54,500

Average Profit = ` 1,09,500/3 = ` 36,500 Average Profit = ` 1,54,500/4 = ` 38,625
Four years’ average profit is higher than the three years’ average profit. Therefore, the value
of Goodwill will be 80% of ` 38,625 = ` 30,900.

Illustration 2.
XY & Co., a partnership firm, intends to estimate the value of its Goodwill on the basis
of three years’ purchase of super profit of the firm. The capital employed in the firm is
` 1,50,000 and the normal rate of return is 20%. Profits for the last four years were:
2014–15—` 35,000 2015–16—` 38,000
2016–17—` 42,000 2017–18—` 45,000
Solution:
Capital Employed = ` 1,50,000
Normal Rate of Return = 20%
∴ Normal Profit = ` 1,50,000 × 20/100 = ` 30,000

` 35,000 + 38,000 + 42,000 + 45,000` ` `
Average Profit = 4
= ` 40,000.
Super Profit = Average Profit – Normal Profit
= ` 40,000 – ` 30,000 = ` 10,000
Goodwill = Super Profit × No. of Years’ Purchase
= ` 10,000 × 3 = ` 30,000.