Textbook for CBSE Class XII Re AVESMultiple Choice Questions (MCQs) Select the correct alternative: 1. Which of the following statement is correct? (a) Goodwill is a fictitious asset. (b) Goodwill is a current asset. (c) Goodwill is a tangible asset. (d) Goodwill is an intangible asset. Excess amount that a firm gets over and above the market value of assets at the time of sale of its business is (a) Profit. (b) Super Profit. (c) Reserve. (d) Goodwill. . The term ‘Number of Years’ Purchase’ means (a) The number of years during which the purchaser of Goodwill expects that the profit due to goodwill are likely to arise in future. (b) Number of years for which goodwill is purchased. (c) Number of years for which goodwill purchased will not help the firm in earning similar profits. (d) None of the above. 4. Capital employed by a partnership firm is 5,00,000. Its average profit is € 60,000. The normal rate of return is similar type of business is 109. The amount of super profit is (a) = 50,000. (b) 10,000. (c) 6,000. (d) 56,000. 5. Raj & Associates is a partnership firm. Ajay is admitted as a partner. Its Goodwill is to be valued by Average Profit method. Average profit for the past 5 years is € 1,50,000, and Goodwill is being valued at 3 years’ purchase of average profit, value of Goodwill of the firm will be (a) %4,50,000. (b) %1,50,000. (c) %3,00,000. (d) %6,00,000. 6. Following were the profits of a firm for the last 3 years: Year Profit (2) 2020-21 3,00,000 (including abnormal gain of € 90,000) 2021-22 2,40,000 (after charging abnormal loss of & 1,20,000) 2022-23 3,60,000 (excluding % 1,20,000 payable on the insurance of machinery) Goodwill of the firm on the basis of 4 years’ purchase of the average profit for the last 3 years will be (a) %12,00,000. (b) %10,80,000. (c)_%12,80,000. (d) None of these.2.24 Double Entry Book Keeping—CBSE Xl jwill is useful when (b) Profits show a trend either rising (d) Profits are similar in all the years, Weighted Average Profit Method of calculating good (a) Profits are not similar over the years. (©) Profits are higher in one year and lower in another. 8. Average profit of a business over the las ive years was € 60,000. The normal veld on capita such a business Is estimated at 10% pa. Capital invested in the business is 5,00,000. Amount ofgg ifitis based on 3 years’ purchase of lat 5 years super profits will be (2) &1,00,000, (b) %1,80,000. () % 30,000. (d) 7 1,50,000. 9. The formula for valuing goodwill under the Capitalisation of Super Profit method is: {@) Super Profit made by the firm multiple by the Normal Rate of Return. (©) Capital Employed by the firm multiplied by the Normal Rate of Return. (©) Capitalised Profit of the firm divided by the Rate of Return. (d) Super Profit of the firm divided by the Normal Rate of Return. 10. Total Capital employed in the firm is & 8,00,000, Normal Rate of Retur %1,20,000. Value of goodwill as per Capitalisation Method would be (a) %8,20,000. (b) = 1,20,000. (©) Nil. (d) %4,20,000. 11. A firm eams profit of 1,10,000, The Normal Rate of Return is 10%. Assets of the firm are 811,00 liabilities & 1,00,000. Value of goodwill by Capitalisation of Average Profit will be (a) %2,00,000. (&) 210,000. (c) 75,000. (d) %1,00,000. 12. Under Super Profit Method, goodwill is calculated by: (2). Number of years’ Purchase x Average Profit. (b) Number of years’ Purchase x Super Profit. (0) Super Profit + Normal Rate of Return, (d) Super Profit ~ Normal Profit. 13. M/s. Supertech India has assets of & 5,00,000, whereas Liabilities are: Partners’ Capitals— +3,50,000, Ger Reserve—Z 60,000 and Sundry Creditors— 90,000. If Normal Rate of Return is 10% and Ge o firm is valued at 90,000 at 2 years’ purchase of Super Proft, the Average Profit of the firm will (a) % 46,000. {b) 786,000. (o) €1,63,000. (a) % 23,000. 14, A firm earned ¥ 60,000 as profit, the normal rate of return being 10%. Assets of the firm are (excluding goodwill) and Liabilities are & 2,40,000. Find the value of Goodwill by Capitalisation © Profit Method. “4 (@) %2,40,000 (b) %1,80,000 (co) 71,20,000 (d) %60,000 Jagat and Kamal are partners in a firm. Their Capitals are: Jagat € 3,00,000 and Karnal & 24 the year ended 31st March, 2023, the firm earned a proft of €1,50,000. The normal rate of f= Calculate the value of Goodwill of the Firm by Capitalisation Method. (@) %2,00,000 ee (b) %5,00,000 (350,000 fee (a) %250,000 .% 14,00,000 and outside liabilities are & 4,00,000, Profit of the ir mployed will be 15% and profit forthe y 15. 16.Chapter 2: Goodwill: Nature and Valuation 2.25 17, Average Profit ofthe firm is %6,00,[Link] tangible Assets in the firm are & 28,00,000 and Outside Liabilities ‘are%8,00,000. In the same type of business, the normal rate of return is 20% ofthe capital employed. Calculate the value of goodwill by Capitalisation of Super Profit Method, (a) 710,00,000 (b) %5,00,000 ( €2,50,000 (d) %15,00,000 18, Ram and Prem are partners in a retail business. Balances in Capital and Current Accounts as on 31st March, 2022 were: Capital Account @) Current Account () Ram : 2,00,000 50,000 . . Prem 2,40,000, 10,000 (Dr) The firm earned an average profit of 90,000. Ifthe normal rate of return is 10%. Find the value of Good by Capitalisation Method (a) %420000 ee : S10 000, (@) %2,20,000 19. Information: Capital Accounts of Partners Naresh and Vikesh— 5,00,000 each; Balances in Current Accounts of Naresh and Vikesh—Z 50,000 and % 40,000 respectively; Bank Loan—¥ 10,00,000; Goodwill % 50,000; Investments—¥ 25,000; Advertisement Suspense—E 15,000. Based on the above information, Capital Employed for the purposes of valuation of Goodwill will be (@) %10,90,000. (b) %10,75,000. (9 %10,00,000. (@ %10,40,000. 20. Information: Total of Assets side of the Balance Sheet— 25,00,000. Debit Balances in Current Accounts of Naresh and Vikesh— 75,000 and @ 25,000 respectively; Bank Loan— 8,00,000; Goodwill 2 1,00,000; Trade Investments —¥ 25,000; Profit and Loss Account (Debit) 15,000. Based on the above information, Capital Employed for the purposes of valuation of Goodwill will be (@) %1685,000. (b) %15,85,000, (© 217,85,000. (d) %14,85,000, Arrange the following steps involved for the Valuation of Goodwill by Average Profit Method: 1. Goodwill = Average Profit x No. of Years’ Purchase. 2. Average Profit = Total Profits/No. of Years. 21. 3. Calculate normal profit or loss for each of the past year, after adjusting any abnormalities, 4. Calculate total profits by adding each relevant year’s past profits. (a) 4,2,3,1. (b) 1,3,4,2. © 23,14. (@) 3,4,2,1. [Ans.:1. (d);2. (d);3. (a); 4. (b); 5. (a); 6. (b);7.(b);8. (); 9. (A); 10. (c); 11. (d); 12. (b); 13. (b); 14. (c); 15. (d); 16. (a); 17. (a); 18. (a); 19. (c); 20. (d); 21. (@)] Assertion-Reason Based MCQs Given below are two statements (in each question), one labelledas Assertion (A) and otherlabelled as Reason (R): 1. Assertion (A): Goodwill isan intangible asset because of which an enterprise's likely to earn higher profits without putting extra efforts. . Reason (R): Goodwill is an intangible asset as it exists but does not have a physical existence. Also, if | an enterprise enjoys goodwill, it will have repeated customers and will also attract more ‘customers due to which sales will increase and thus ine profits. | : is2.26 Double Entry Book Keeping—CBSE Xi ae context of above two statements which ofthe follow ie correct explanation of As. {2 Aston and Reason re coret but the sen Ft a bare plaitin or daca (b) Both Assertion (A) and Reason (R ae correct and Reason (i the c Ssertion (€) Assertion (A) is correct but the Reason (R) is not correct: (4) Both Assertion (A) and Reason (R) are incorrect ey on in the books of ramen ee cent ete he ang Pare! Parnes and neh Partner or partners, Reason (R): According soe Intangible Assets, Self-generated Goodwill is not recognised in the books ‘of accounts because the value is not paid for it. ln the context of above two statements, which ofthe following is correct? (a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation o Assertion (A). (b) Both Assertion (A) and Reason (R) are correct and Reason (R} Is the correct explanation of Assertion a) {c) Both Assertion (A) and Reason (R) are not correct. (A) Assertion (A) is not correct but the Reason (R) is correct. count ON FecOnStitution of fy, 3. Assertion (A): Goodwill is valued at the time of firm’s reconstitution because gaining partners have tp compensate the sacrificing partners for gaining profit share, Reason (R): Goodwill is an intangible asset which is recognised in the books of account if an amounts paid for it. In the context of above two statements, which ofthe following is correct? (2) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (a (b) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A, (0) Assertion (A) is correct but the Reason (R) is not correct. (d) Both Assertion (A) and Reason (R) are incorrect. 4. Assertion (A): Goodwill is an intangible asset and is recognised as an asset only when consideration is paid for it. Reason (R): 5.26, Intangible Assets prescribes to recognise goodwill as an asset only when consideration has been paid forit. In the context of above two statements, which of the following is correct? (a) Assertion (A) and Reason (R) are correct but the Reason (R) isnot the correct explanation of Assertion (A. (b) Both, Assertion (A) and Reason (R) are correct and Reason (is the correct explanation of Assertion (Al. (©) Assertion (A) is correct but the Reason (R) is not correct, (d) Both Assertion (A) and Reason (R) are incorrect, (Ans.:1. (b); 2. (d);3. (a);4. (OM) eee Code for spatial MCQs and Assertion- Reason: CQs i Very Short Answer Type Questions 1. Define Goodwi 2, State any three circumstances other than (i) adi (i) death of a partner, when need for valuation of g 3. Give any two features of Goodwill. ar2008) Nn of a new partner, (ii) retirement of a partner a Joodwill of a firm may arise, (wen 28Chapter 2 Goodwill: Nature and Valuation 2.27 ‘4, What is meant by Purchased Goodwill? 5, What is meant by Self-generated Goodwill? 6. What is meant by Average Profit? 7. What are ‘Super Profits’? (Delhi 2011 C) 8, What is meant by Capitalisation of Average Profit? 9. What is meant by Capitalisation of Super Profit? 10. Give the formula for calculation of Goodwill by ‘Capitalisation of Average Profit, (Deihi, AI 2012.0 11. Give the formula for calculation of Goodwill by 12. ‘Capitalisation of Super Profit Method: ——(Dethi 2012 0) Enumerate two main steps involved in valuing Goodwill according to Super Profit Method, (4/2012 ©) Average Profit Method 1. Goodwill is to be valued at three years’ purchase of four years’ average profit. Profits of the firm for last four years ending 31st March, were: 2020—X 12,000; 2021—% 18,000; 2022— 16,000; 2023-8 14,000. Calculate amount of Goodwill [Ans.: Goodwill 45,000.) 2. Profits for the five years ending 31st March, are as follo\ Year 2019—% 4,00,000; Year 2020—% 3,98,000; Year 2021 4,50,000; Year 2022—% 4,45,000 and Year 2023 5,00,000. Calculate goodwill of the firm on the basis of 4 years’ purchase of 5 years’ average profit. (NCERT, Modified) [Ans.: Goodwill 17,54,400] 3. Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They take Deep into Partnership from 1st April, 2023 for 1/Sth share in the future profits. For this purpose, goodwill is valued at 100% of the average annual profit of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were: Year Ended Profit (®) 31st March, 2023 2,88,000; 31st March, 2022 1,81,800; 31st March, 2021 1,87,200; 31st March, 2020 253,200, Calculate the value of goodwill [Ans.: Goodwill 2,27,550.) 4. Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2: 1. They admit Parv into Partnership for 1/4th share on 1st April, 2023. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher, The agreed profits for Jeodwill purpose of the past five years ended 31st March, are: Year 2019 2020 2021 2022 . 2023 Profits @) 14,000 15,500 10,000 16,000 15,000 Calculate the value of goodwill, [Ans.: Goodwill 56,500.)2.28 Double Entry Book Keeping—CBSE Xl Average Profit Method when Past Adjustments are Made 5. Asin and Shreyas were partners sharing profs and losses inthe to of 2:1. coed Shyam as Partner for 1/Sth share in profits. For this purpose ‘Goodwill of the firm was tobe bani on the basis of t years’ purchase of last five years’ average profit. Profits for the last five years ended 31st March, were. oe Year 2019 2020 age Ae Profits @®) 325000 100000 | (62,500) 1,25,000 Calculate Goodwill of the firm after adjusting the following: Profit of 2019-20 was calculated after charging & 25,000 for abnormal loss of goods by fre, {Ans.: Goodwill 3.00009) Madhu and Vidhi are partners sharing profits in the ratio of 3 : 2. They decided to admit Manu as a partner from 1st April, 2023 on the following terms: ()_ Manu will be given 2/5th share of the proft. (i) Goodwill ofthe firm wil be valued at two years’ purchase of three years’ normal average profit ofthe im, Profits of the previous three years ended 31st March, were: 2023—Profit & 30,000 (after debiting loss of stock by fire % 40,000). 2022—Loss ® 80,000 (includes voluntary retirement compensation paid & 1,10,000) 2021—Proft ® 1,10,000 (including a gain (profit) of € 30,000 on the sale of fixed assets). Calculate the value of goodwill. {Ans.: Goodwill 120,000] Tarang purchased Jyoti’s business with effect from 1st April, 2023. Profits shown by Jyot’s business for the last three financial years ended 31st March, were: 2021: © 1,00,000 (including an abnormal gain of & 12,500). 2022 €1,25,000 (after charging an abnormal loss of & 25,000). 2023: € 112,500 (excluding & 12,500 as insurance premium on firm's property—now to be insured). Calculate the value of firm's goodwill on the basis of two years’ purchase of the average profit of the last three years. [Ans.: Goodwill 2,25,000] 7. 8. Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four yeas! purchase of average profit of last five years. These profits for the year ended 31st March, were: Year 2019 2020 2021 2022 2023 Profits/Loss (®) 1,50,000 3,50,000 5,00,000 7,10,000 (690,000) (On 1st April, 2022, a car for % 1,00,000 was purchased and debited to Travelling Expenses Account, 0” which depreciation is to be charged @ 25% paa. Interest of € 10,000 on Non-trade Investments is credit to Income for the year ended 31st March, 2022 and 2023. Calculate the value of goodwill after adjusting the above. [Ans.: Goodwill 9,40,000) ‘9. Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3: 2. They admit Kanika into partnership for 1/4th share in profit, Kanika brings her share of goodwill in cash. Goodwill for this Purbos® is to be calculated at two years’ purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were: 2021—Profit % 50,000 (including profit on sale of assets & 5,000). 2022—Loss & 20,000 (including loss by fire = 30,000). 2023—Profit ¥ 70,000 (including insurance claim received & 18,000 and interest on investments and Dividend received ® 8,000). SO ee Calculate the value of goodwill Also, calculate goodwill brought by Kanika. {Ans. Goodwill 66,000; Kanika shall bring 1/4th of 66,000, ie, € 16,500 a5Chapter 2: Goodwill: Nature and Valuation 2.29 10, Sumit purchased Amit’ business on 1st April, 2023. Goodwill was decided to be valued at two years’ purchase of average normal profit of last four years. The profits for the past four years were: Year Ended 3ist March, 2020 | 31st March, 2021 | 31st March, 2022 | 31st March, 2023 Profits @) 80,000 145,000 1,60,000 2,00,000 Books of Account revealed that: () Abnormal loss of € 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2020. (i) A fixed asset was sold in the year ended 31st March, 2021 and gain (profit) of € 25,000 was credited to Profit & Loss Account. Gi) In the year ended 31st March, 2022 assets of the firm were not insured due to oversight. Insurance premium not paid was & 15,000, Calculate the value of goodwill [Ans.: Goodwill 2,82,500.] Weighted Average Profit Method 11, Profits of a firm for the year ended 31st March for the last five years were: YearEnded | 31stMarch, 2019 | 31stMarch, 2020 | 31stMarch, 2021 | 31stMarch,2022 | 31st March, 2023, Profits @) 20,000 24,000 30,000 25,000 18,000 Calculate value of goodwill on the basis of three years’ purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2019, 2020, 2021, 2022 and 2023. {Ans.: Goodwill 69,600.) 12, Raman and Daman are partners sharing profits in the ratio of 60 : 40 and for the last four years they have been getting annual salaries of € 50,000 and % 40,000 respectively. The annual accounts have shown the following net profit before charging partners’ salaries Year ended 31st March, 20218 1,40,000; 2022—¥ 1,01,000 and 2023 1,30,000, On ‘st April, 2023, Zeenu Is admitted to the partnership for 1/4th share in proft (without any salary) Goodwill is to be valued at four years’ purchase of weighted average profit of last three years (after Partners’ salaries); Profits to be weighted as 1, 2 and 3, the greatest weight being given to the last year. Calculate the value of Goodwill (Ans.: Goodwill 1,28,000.] Super Profit Method 13. The capital of the firm of Anuj and Benu is % 10,00,000 and the market rate of interest is 15%. Annual salary to the partners is € 60,000 each. The profit for the last three years were & 3,00,000, % 3,60,000 and %4,20,000. Goodwill of the firm ts to be valued on the basis of two years’ purchase of last three years average super profit. Calculate the goodwill of the firm. (BSE 2019) (Ans.: Goodwill 1,80,000.] 4, Atul and Bipul had a firm in which they had invested & 50,000, On an average, the profits were 2 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years’ purchase of profits in excess of profits @15% on the money invested. Calculate the value of good Ans.: Goodwill 34,000] 1S, Total capital of the firm of Sakshi, Mehak and Megha is ® 1,00,000 and the market rate of interest is 1596, The net profits for the last 3 years were % 30,000; & 36,000 and % 42,000. Goodwill is to be valued at 2 years’ purchase of the last 3 years’ super profit. Calculate the goodwill of the firm. (Delhi 2017 _ (Ans: Goodwill—& 42,000]2.30 Double Entry Book Keeping—CBSE XII 9 the last few years. The normal rate of p 16. A business earned an average profit of & 8,00,000 during NT 4 jiabilties of the business in the similar type of business is 10%, The total value of A556 C17 rn by super profit methog % 22,00,000 and & 5,60,000 respectively. Calculate the value of goo" (eth 20146 if itis valued at 2% years’ purchase of super profit. 560,000 =% 16,0,000; Normal Profit 1,64 tans. Net Assets =% 2200000-£ ‘per Profit 6.36000; Co0dWil 15,9009) 1e capital employed Average net profit expected in future by XYZ frm fs € 36000 PY eased iit class of bis business by the frm is € 2.00000. The normal rate of return fom capa AN ss is 10%. Remuneration of the partners is estimated to be © 6,000 pa. ianslé Goodie ee the basis of two years’ purchase of super profit. 18. A partnership firm earned net profits during the last three years 2021—¥ 17,000; 2022—% 20,000; 2023—% 23,000, Capital investment in the firm throughout the al regard to the risk involved, 15% is considered to be on the basis of two years’ purchase of average super profit earned dui 7. ended 31st March, as follows: bove-mentioned period has been € 80,000. Having 3 fair return on the capital. Calculate value of goodwil ing the above-mentioned three years [Ans.: Goodwill 16,000) 5 of & 75,000 including cash of & 5,000. Its creditors, ‘amounted to & 5,000 on that date. The firm had a Reserve of X 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 profi, find average profit per year of the existing firm, ans. Capital Employed—X 70,000; Normal Profit—X 14,000; Super Profit 6,000; ‘Average Profit = Normal Profit + Super Profit = 20,000} 19. On 1st April, 2023, an existing firm had asset: ‘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. {Ans.: Capital Employed—€ 13,75,000] 20. Super Profit Method when Past Adjustments are Made 21. 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. (Al 20150) [Ans.: Goodwill 5,42,500] 22. 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 rate of return is 15% Calculate goodwill of the firm on the basis of 3 times the super profit. (Ans. Goodwill 2,70,000] 23. Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e. 1st April, 2023. 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: Year Ended Net Profit @) 31st March, 2019 1,50,000 31st March, 2020 180,000 3st March 2021 1,00,000 (including abnormal loss of &1,00,000) st March, 2,60,000 (Including ab it) 0 ; 31st March, 2023, 2,40,000 Sseorrel anh (oot ol aaa The firm has total assets of & 20,00,000 and Outside Liabilities of Cf Return in similar business is 10%. coomeeiontat ae Noa Calculate value of goodwill, [Ans.: Goodwill 144Chapter 2 Goodwill: Nature and Valuation 2437 capitalisation Method 24, From the following information, calculate value of goodwill of the firm by applying Capitalisation Method: Total Capital of the firm X 16,00,000, Normal rate of return 10%, Profit for the year ® 2,00,000. tAns.: Goodwill 4,00,000. 25, A firm eamed average profit of & 3,00,000 during the last few years. The normal rate of return of the industry js 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. (CBSE 2019) [Ans.: Goodwill 8 5,00,000} 26. Aand 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 20209 [Ans.: Goodwill 2,50,000.] [Hint: Goodwill = Capitalised Value of Average Profit - Capital Employed] 27, 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. [Ans.: Goodwill 4,50,000 28. From the following particulars, calculate value of goodwill of a firm by Capitalisation of Average Profit Method: (i) Profits of ast five consecutive years ending 31st March, are: 2023—€ 54,000; 2022— 42,000; 2021 39,000; 2020—¥ 67,000 and 2019—% 59,000. (i) Capitalisation rate 20%. (ii). Net assets of the firm % 2,00,000. {Ans.: Goodwill —8 61,000 29. 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: {) Capitalisation of Super Profit Method, and (i 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. (@elhi 2013 0 [Ans.: (i) Goodwill 7,20,000; (ii) Goodwill 2,16,000.) 30. 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. {Ans.: Goodwill— 9,00,000 in both cases. 31. 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, ind the actual profits of the firm, (CBSE Sample Paper 2018) [Ans.: Capital Employed—X 110,000; Normal Profit— 8,800; Average Actual Profit 23,800.) {Hint: % 60,000 (Goodwill) = 4 (Average Actual Profit - Normal Profit). Capitalisation of Super Profit 32. 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. (Seoeuey [Ans.: Goodwill—Z 5,00,000.)2.32 Double Entry Book Keeping—CBSE Xil capital of € 2,00,000. The normal rate of rety fit method, workout the value ofthe goog (Wceeny [Ans.: Goodwill 1,99, on | itals were Rajan & 3,00,000; Rajani 2,00,000. Dur of& 1,50,000. Calculate the value of goody the normal rate of return is 20%, (CERT oa (Ans.: Goodwill 250 99) 33. Raja Brothers eam an average profit of & 30,000 with a in the business is 109, Using capitalisation of super pro! of the firm. 34, Rajan and Rajani are partners in a firm. Their capi the year ended 31st March, 2023, the firm earned a profit of the firm by capitalisation of super profit assuming that t pital employed in the business is & 300,099, 35. Average profit of GS & Co. is % 50,000 per year. Average Ca ae one me calculate goodwill of the firm by: If the normal rate of return on capital employed is 10%, cal (Super Profit Method at three years’ purchase; and (ii) Capitalisation of Super Profit Method. 36. 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: () 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. [Ans.: Goodwill—() € 14,40,000; (i) 432,000] {ans.: Goodwill—() % 60,000; (i) 2,00 099) 37. 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, 2023—% 2,00,000, 31st March, 2022—% 1,80,000, and 31st March, 2021— 1,60,000. (©) 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 € 100,000. [Ans.: Goodwill —() & 2,40,000; i) & 60,000; i € 2,00,000; (iv) & 2,00,000)Chapter 2 Goodwill: Nature and Valuation 2.33 rer TEST YOUR KNOWLEDGE EOE 4, Goodwill is not accounted in the books if ) a eeu (b) Iisa Self-generated Goodwill. Ne) Wis decided to be accounted by the partners (d) Its amount is paid by the gaining partner. 2, Which of the following is not rue in relation to goodwill {@) Itisan intangible asset. (b) Itisa fictitious asset. (0) Ithasa realisable value, (d) Allof these. 3. Which of the following factors affect the value of goodwill? (@) Favourable Location. (b) Favourable Contracts. (© Efficiency of Management. (@) Allof these. 4, Under Capitalisation of Super Profit basis of goodwill valuation, goodwill is calculated by (a) Average Profit x No. of years’ purchase. (b) Super Profit x No. of years’ purchase. ( Weighted Average Profit x No. of years’ purchase. (d) Super Profit divided with Expected Rate of Return, 5. Under average profit method of goodwill valuation, value of goodwill is determined by (@) No. of years’ purchase multiplied with average profit. {b) No. of years’ purchase multiplied with super profit. (©) Super profit divided with expected rate of return (@) Total profits divided with normal rate of return. 6. P,Qand Rare partners sharing profits and losses in the ratio of 2:2: 1. They admit S for 1/Sth share. For the purpose of admission ofS, the goodwill ofthe firm is to be valued at 3 years’ purchase of the average of 5 years’ profit or loss. The profits (Loss) are: Year 2018-19 2019-20 | 2020-21 2021-22 2022-23 Profits/(Loss) @)| 30,000 70000 | —_1,00,000 140,000 (1,20,000) On 1st April, 2022, a motor cycle costing % 40,000 was purchased and debited to Travelling Expenses, on which depreciation is to be charged @ 25%. The value of goodwill is. fa) % 50,000. (b) %1,56,000. (9 1,50,000, (a) %1,60,000. 7. Given below are two statements, one labelled as Assertion (A) and the other labelled as Reason (R): Assertion (A): Goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the super profits. Reason (R): Goodwill is the present value of expected super profits of a firm. Inthe context of above two statements, which of the following is correct? {@) Assertion (A) is correct but Reason (R) is wrong. (b) Both Assertion (A) and Reason (R) are correct but Reason (R) is not the correct explanation of Assertion (A). (0 Only Reason (R) is correct. (@) Both Assertion (A) and Reason (R) are correct, and Reason (R) isthe correct explanation of Assertion (A). a2.34 Double Entry Book Keeping—CBSE XIl 10. . Average Profit t 4,40,000, Capital Employed % 8,00,000; Ni Find the capitalised value of business from the following information: Annual Profit = % 8,00,000; Normal Rate of Return = 20% Assets (including cash) = 62,00,000; Cash & 2,00,000; Outside liabilities = = 10,00,000. (a) % 40,00,000 (c) %52,00,000 (b) % 1,60,00,000 (d) % 45,000 lormal Rate of Return 15%, Management Cost during this period is estimated to be € 2,00,000. Calculate the value of goodwill on the basis of two years’ purchase of Super Profit, A frim earns profit of = 250,000. The Normal Rate of Return of total asset (excluding goodwill) and total ou % 27,50,000 and& 7,00,000 respectively, in a similar type of business is 10%. The value tsiders' liabilities as on the date of valuation of goodwill are Calculate the value of goodwill by adopting Capitalisation of Super Profit Method, + Ajit and Baljit were sharing profits in the ratio of 3