Page 67 - DEBKVOL-1

Chapter 3 Goodwill: Nature and Valuation 3.9
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3. A firm earns profit of ` 1,00,000. 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
` 12,00,000 and ` 3,80,000 respectively. Calculate the value of Goodwill according to Capitailisation of Super
Profit Method. [Ans.: Goodwill = ` 18,000 (Super Profit) × 100/10 = ` 1,80,000.]
4. Ravi and Kant are partners in a business with balances in their Capital and Current Accounts as on
31st March, 2018 were:
Capital Account Current Account
Ravi ` 2,50,000 ` 50,000
Kant ` 3,00,000 ` 25,000 (Dr.)
The firm earned an average profit of ` 1,25,000. If the normal rate of return is 10%, find the value of
goodwill by Capitalisation Method. [Ans.: Value of Goodwill = ` 6,75,000.]
5. Calculate the goodwill of a firm on the basis of three years’ purchase of the weighted average profit of
the last four years. Profits of these four years ended 31st March, were:

Year Ended 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018
Profits (`) 40,400 49,600 40,000 60,000

The weights assigned to each year ended 31st March are: 2015—1; 2016—2; 2017—3 and 2018—4.
You are provided with the following additional information:
(i) On 31st March, 2017, a major plant repair was undertaken for ` 12,000 which was charged to revenue.
The said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of
10% p.a. on Written Down Value Method.
(ii) The Closing Stock for the year ended 31st March, 2016 was overvalued by ` 4,800.
(iii) To cover management cost an annual charge of ` 9,600 should be made for the purpose of goodwill
valuation. [Ans.: Value of Goodwill = ` 1,31,880.]
6. Mahesh and Suresh are partners and they admit Naresh into partnership. They agreed to value goodwill
at three years’ purchase on Weighted Average Profit Method taking profits for the last five years. They
assigned weights from 1 to 5 beginning from the earliest year and onwards. The profits for the last five
years were as follows:

Year ended 31st March, 2014 31st March, 2015 31st March, 2016 31st March, 2017 31st March, 2018
Profits (`) 1,25,000 1,40,000 1,20,000 55,000 2,57,000
Books of Account revealed the following:
(i) A second hand machine was purchased for ` 5,00,000 on 1st July, 2016 and ` 1,00,000 were spent to
make it operational. ` 1,00,000 were wrongly debited to Repairs Account. Machinery is depreciated
@ 20% p.a. on Written Down Value Method.
(ii) Closing Stock as on 31st March, 2017 was undervalued by ` 50,000.
(iii) Remuneration to partners was to be considered as charge against profit and remuneration of
` 30,000 p.a. for each partner was considered appropriate.
Calculate the value of goodwill. [Ans.: Value of Goodwill—` 3,15,000.]
7. Rakesh and Ashok earned a profit of ` 5,000. They employed capital of ` 25,000 in the firm. It is expected
that the normal rate of return is 15% of the capital. Calculate amount of goodwill if goodwill is valued
at three years’ purchase of super profit. [Ans.: Goodwill—` 3,750.]