Page 63 - DEBKVOL-1

Chapter 3 Goodwill: Nature and Valuation 3.5
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Illustration 6.

A firm earns a profit of ` 2,00,000. The 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 valuation of Goodwill are ` 22,00,000 and ` 5,60,000 respectively. Calculate the value
of Goodwill according to Capitalisation of Super Profit Method.
Solution:
Average Profit (Given) = ` 2,00,000
Normal Profit = (` 22,00,000 – ` 5,60,000) × 10/100 = ` 1,64,000
Super Profit = ` 2,00,000 – ` 1,64,000 = ` 36,000
Goodwill = ` 36,000 × 100/10 = ` 3,60,000.
Illustration 7 (Average Profit Method when Adjustments are Made).

A purchased B’s business with effect from 1st April, 2018. It was agreed that the firm’s goodwill
is to be valued at two years’ purchase of average normal profit of the last three years. The profits
of B’s business for the last three years were:

2015–16 — ` 1,00,000 (including an abnormal gain of ` 10,000).
2016–17 — ` 1,10,000 (after charging an abnormal loss of ` 20,000).

2017–18 — ` 80,000.
Calculate value of the firm’s goodwill.

Solution:
Normal Profits `
Profit for 2015–16 (` 1,00,000 – ` 10,000) 90,000
Profit for 2016–17 (` 1,10,000 + ` 20,000) 1,30,000
Profit for 2017–18 (` 80,000) 80,000
Total profits for last three years 3,00,000
` 3,00,000
Average Normal Profit = = ` 1,00,000
3
Goodwill = 2 years’ purchase of 3 years’ average normal profit
= ` 1,00,000 × 2 = ` 2,00,000.
Illustration 8.

Bharat and Bhushan are partners in a retail business. Balances in Capital and Current Accounts
as on 31st March, 2018 were:

Capital Account Current Account
Bharat ` 2,00,000 ` 50,000
Bhushan ` 2,40,000 ` 10,000 (Dr.)

The firm earned an average profit of ` 90,000. If the normal rate of return is 10%, find the value
of goodwill.