VALUATION OF GOODWILL

Valuation of goodwill [q. 2 (A): 5 Marks]

1.      The profits of the firm for the last five years are 2002 Rs. 20,000; 2003 Rs. 16,000; 2004 Rs. 24,000; 2005 Rs. 8000; 2006 Rs. 12,000. Calculate the goodwill of the firm.  [Ans. Rs. 16,000]

2.      Mona, Reena and Sona have been carrying on a partnership business and good will of their firm is to be valued at three years purchase of the average profit for the last five years. The profit and losses for the last five years have been.  1st Year Rs. 16,000, 2nd Year, 15,000, 3rd Year, 8,000(Loss), 4th Year, 7,000, 5th Year, 10,000. [Ans. Rs. 24,000]          
3.      Calculate the good will from the following information goodwill is valued at three years purchase of average profit of the last six years. Profit and losses of the business in the last six years are as follows,
1st   year,
Rs, 40,000(Profit)
2nd Year,
Rs, 60,000(Profit)
3rd Year,
Rs, 10,000(Loss)
4th Year,
Rs, 50,000(Profit)
5th Year,
Rs, 30,000 (Loss)
6th Year,
Rs, 80,000(Profit)
                                                                                                                                             [Ans.  Rs. 95,000]
4.      Calculate the value of goodwill according to average profit method. Goodwill is valued at three years purchase of last four year average profit. The profits and losses for the last four years are.
1st Year Rs,
10,000(Profit)
2nd Year Rs,
12,000(Profit)
3rd Year Rs,
4,000(Loss)
4th Year Rs,
18,000(Profit)

                                                                                                                                                [Ans. Rs. 27,000]              
5.      The profit of a firm for the four years from 1991 to 1994 where_
1991     
Rs, 40,000
1992
Rs, 45,000
1993
Rs, 55,000
1994
Rs, 53,000
     Calculate the goodwill of the firm at 2yrs. Purchase of the average profit for the last three years.                                                                                                                                [Ans. Rs. 1, 02,000]
6.      Mr. X a businessperson has earned the following profits in the last five years.
1995
1, 05,800
1994
1, 02,600
1993
98,400
1992
96,800
1991
95,500
    Value goodwill of Mr. X on the basis of three years purchase of average of the past five years.
[Ans. Rs. 2, 99,460]
7.      Good will is valued at three years purchase of last five years average profit. The profits for the last five years are     
 1st Year
4,800(p)
2nd Year
7,200(L)
 3rd Year
10,000(L)
4th Year
3,000(P)
5th Year
5,000(L)
                                                                                                                                                                   [Ans. 0]
Note: - Since the company’s average profit is negative. Therefore the firm’s goodwill is zero.

8.      Compute the goodwill the following case good will is valued at three years purchase of average profit of five years. The Profit of the five years were_
1st Year
5,800
2nd Year
7,400
3rd Year
20,000
4th Year
3,500
5th Year
7,300
                                                                                                                                                [Ans. Rs. 26,400]


9.      Sales of trader for 3years ended 30th June 1995 are as follows
1995
Rs, 5, 50,000
1994
Rs, 5, 46,000
1993
Rs, 5, 25,000
The profit margin for the 3 years ended 30th June 1995 was 10%, 12%, 12% respectively. For the purpose of selling the business of the trader, goodwill is to be valued at 2years purchase of the average profit of the last 3years. Find the value of good will.                                   [Ans. Rs. 1, 22,680]


10.  From the following particulars, value good will of 2yrs. Purchase of last 5 years.
Year ended
Turn over
Net profit
31-12-1990
31-12-1991
31-12-1992
31-12-1993
31-12-1994
5,15,000
5,45,600
5,35,800
5,40,900
5,60,800
5%
6%
7%
7.5%
7%
                                                                                                                                                                [Ans. Rs. 70,326]


11.  A firm with an average capital employed of Rs. 1, 60,000 is expected to earn Rs, 40,000 per annum in future. Calculate goodwill at three times the super profit taking the normal rate of return as 15%. [Ans. Rs. 48,000]


12.  Capital employed on 31st December, 1990 was Rs, 1, 00,000/-. The Profits earned by the business for the last 5 years where.
1986
30,000
1987
40,000
1988
50,000
1989
40,000
1990
60,000
Normal rate of return is 15%. Good will is valued at 3 years purchase of the super profits of the business. Find out the value of goodwill.                                                   [Ans. Rs. 87,000]


13.  The books of a business showed that the capital employed on 31st December, 1992 was Rs.1, 00,000/-. Profits for the last five years are_1988, 1989, 1990, 1991 & 1992 were Rs, 60,000, Rs, 55,000, Rs, 75,000, Rs, 85,000 & Rs, 65,000 respectively. Goodwill is valued at 2 years purchase of the Super profit of the business. NRR is 10%. [Ans. Rs. 1, 16,000]
14.  M/s XYZ partnership firm earned net profit during the last four years were Rs, 7,000. Rs, 13,000. Rs, 12,000 and Rs, 8,000. The capital investment made in the firm was Rs, 50,000. N.R.R on capital is 15%. The remuneration of the partners during the period is Rs, 500 p.a. Good will is valued at 2 Yrs purchase of Average super profit of the above mentioned years.    [Ans. Rs. 4,000]


15.  M/s Vijay trading company earned net profit during the last four years was follows.
1st Yea r
Rs, 57,000
2nd Year
Rs, 44,000
3rd Year
Rs, 61,000
4th Year
Rs, 58,000
The capital investment made by the company is Rs, 1, 50,000. Normal Rate of return on capital is 20%. The remuneration of the partners during this period is Rs, 500 p.m. Good will is valued at 2years purchase of Average Super profit of above mentioned period. [Ans. Rs. 38,000]


16.  The average net profit expected in the business by ABC firm is Rs, 36,000 per year. The average capital employed in the business by the firm is Rs, 2, 00,000. The Rate of interest expected from capital invested in the business is 10%. The remuneration of the partners is estimated to Rs, 6,000 P.a. Calculate the value of goodwill based on 2years purchase of super profit. [Ans.  Rs. 20,000]


17.  M/s Rajesh Trading company earned net profit during the last four years were Rs, 15,000, Rs, 28,000, Rs, 30,000 & Rs, 40,000. The capital investment made by the company is 1, 00,000. Normal rate of return on capital is 15 %. The remuneration of the partners during this period is Rs, 1,000p.a. Good will is valued at 2 years purchase of average super profit of the above mentioned period.  [Ans. Rs. 24,500]
18.  The present average net profit of Braful, Shobha partnership firm before detecting partner’s remuneration is Rs, 27,000 p.a. The capital employed in the business by the partner Braful Rs, 1, 00,000 & Shobha Rs, 50,000. The profit expected from the total capital invested is 10% p.a. The total remuneration is estimated to be Rs, 6,000 per annum. Find out the value of goodwill on the basis of 2 years purchase of super profit. [Ans. Rs. 12,000]


19.  The following balance sheet of Kantilal, Chandrakant.
                                                             Balance sheet as on 31st March, 1995
Liabilities
Amount
Assets
Amount
Capital
Kantilal
Chandrakant
Reserve Fund
Creditors

90,000
70,000
44,000
38,000

Machinery
Building
Investments
Stock
Debtor
Bank
Profit/loss A/c
50,000
41,000
30,000
20,000
66,000
30,000
5,000
2,42,000
2,42,000
The net profits of the firm for the year ended 31st March, 1995 were Rs, 15,000 Rs, 25,000 Rs, 26,000. Ascertain the value of good will at 2 years purchase of the super profit of the 3years taking the normal rate of return on capital employed is 10%.        [Ans. Rs. 4,200]


20.  The following is the balance sheet of M/s Anna and Chunna as on 31st March 1995.
                                                             Balance sheet as on 31st march, 1995.
Liabilities
Amount
Assets
Amount
Capital
Anna
Chunna
Creditors
Profit/ Loss A/c

1,64,000
40,000
35,000
3,040

Machinery
Building
Plant
Stock
Debtor
Bank

10,000
26,000
56,000
56,000
19,040
75,000
2, 42, 040
2, 42, 040
Net profits for the past 3years are 1st year Rs, 43,350, 2nd year Rs, 36870, 3rd year Rs, 32,280
Normal rate of return on capital employed is 10%. Calculate the value of goodwill at 2years purchase of the average super profit. [Ans. Rs. 33,592]


21.  The average annual profit earned by a firm is Rs. 30, 000 including Rs. 2,000 p.a. received as interest on Non – Trading Investment and this average is expected to continue in the future except for the following.
a.      Rent paid in the past for temporary premises at Rs. 500 per month will no longer have to be paid as the firms own premises are now ready.
b.      b. Salaries Rs. 7,000 p.a. paid in the past will increase by 20% in the future. Calculate goodwill at 3 times the Average Expected Profit.     [Ans. Rs. 97,800]
22.  The firm of Mr. X and Mr. Y earned average annual profit of Rs. 60,000. The profit includes Rs. 5,000 p.a. as interest on non – trading investment. The firm is expected to maintain the profit except the following.
1.       The firm was conducting the business from rented premises. Rent paid Rs. 600 p.a. The premises of the firm are now ready for conducting the business.
2.       The business of the firm was managed by one manager who was paid salary of Rs. 6,000 p.a. Mr. X has decided to manage the firm and replace the manager. Services of Mr. X will be worth Rs. 1,000 p.a.
                    Calculate Goodwill at 2 years purchase of average profit.          [Ans. Rs. 1, 21,200]
23.  Priti and Pritam are partners sharing profits and losses in the ratio of 3:2. They admit Prasad for 1/6th share. For the purpose of admission of Prasad, goodwill of the firm should be valued on the basis of 3 years purchase of the last 5 years average profit. The profits were. [Ans. Rs. 27,000]
Year
1990 – 91
1991 – 92
1992 – 93
1993 – 94
1994 – 95  
Profits Rs.
60,000
62,500
45,000(L)
42,500
80,000


24.  Raghunath’s revenue statements for the 3 years ended 31st Dec. were as under:
Particulars
1995 (Rs.)
1996(Rs.)
1997(Rs.)
Sales
Less: Cost of Sales
Gross Profit
Less : Expenses
Net Profit
50000
(30000)
70000
(50000)
100000
(50000)
20000
(24000)
20000
(10000)
50000
(20000)
(-) 4000
(+)10000
(+)30000
Calculate the value of good will at 2 years purchase of the average profit, earned in the past 3 years.      [Ans. Rs. 24,000]


25.  Raj Kumar revenue statements for the 3 years ended 31 Dec. were as under:
Particulars
1995 (Rs.)
1996(Rs.)
1997(Rs.)
Sales
Less: Cost of Sales
Gross Profit
Less : Expenses
Net Profit
50000
(10000)
70000
(50000)
100000
(50000)
40000
(22000)
20000
(10000)
50000
(20000)
(+)22000
(+)10000
(+)30000
Calculate the value of good will at 2 years purchase of the average profit, earned in the past 3 years. [Ans. Rs. 41,334]
HOME WORK SECTION
1.       Mahipati and Ganpati are partners sharing profits and losses in the ratio of 4:3. They admitted in partnership Shripati for 1/8 share. For the purpose of admission of Shripati, goodwill of the firm should be valued on the basis of 2 years purchase of the last 5 years average profit.
1991 – 92
1992 – 93
1993 – 94
1994 – 95
1995 – 96
Rs. 75,000
Rs. 1,00,000
Rs. 1,25,000
Rs. 85,000
Rs. 1,15,000
Calculate the goodwill of the firm.            [Ans. Rs. 2,00,000]
2.       Jaya and Maya are carrying on a business in partnership for last 12 years. Goodwill of the firm is to be valued at 3 ½ years purchase of the average profit of last 6 years.
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Rs. 2,20,000(Profit)
Rs. 1,20,000(Loss)
Rs. 2,60,000(Profit)
Rs. 1,80,000(Loss)
Rs. 2,90,000(Profit)
Rs. 3,20,000(Profit)
Rs. 2,10,000(Profit)
You are required to calculate the value of Goodwill of the firm. [Ans. Rs. 4,55,000]
[Note: - Last 6 years are to be counted in reverse order of years given. Therefore, profit given for the year (2000 – 01) is to be ignored].
3.       Vijay and Azim carrying on a business in partnership for last 5 years. Goodwill of the firm is to be valued at 3 years purchases of the average profits of last 5 years.
The profits and losses for the last 5 years were:
1996-97
1997-98
1998-99
1999-2000
2000-01
(Profit) Rs. 32,000
(Profit) Rs. 30,000
(Loss) Rs. 16,000
(Profit) Rs. 14,000
(Profit) Rs. 20,000
You are required to calculate the value of goodwill of the firm.  [Ans. Rs. 48,000]
4.       The following is the Balance Sheet of Ashok and Nayan:
Balance Sheet as on 31st March 2007.
Liabilities
Amount
Assets
Amount
Capital
Ashok
Nayan
General Reserve
Profit & Loss A/c
Sundry Creditors

1,00,000
1,20,000
78,000
56,000
36,000
Plant and Machinery
Furniture
Stock
Debtors
Bank
Prepaid Expenses

1,78,000
62,000
48,000
40,000
35,000
27,000
3,90,000
3,90,000
The trading result for the last four years was 2003 – 04: Rs. 65,000 (Profit), 2004 – 05: Rs. 5,000(loss),  
                         2005 – 06: Rs. 78,000 (Profit) and 2006 – 07: Rs. 92,000 (Profit).
Calculate the value of goodwill of the firm at 2 ½ years’ purchases of the super profit considering the
                         Normal rate of return on the capital employed is 13%. [Ans. Rs. 24,975]
5.       Calculate the value of goodwill of the firm from the following information:
                                             i.      Total capital employed in the business Rs. 4,00,000.
                                           ii.      Net profits of the firm or the past three years were Rs. 53,800, Rs. 45,350, Rs. 56,250.
                                          iii.      Normal rate of return at 10%.
                                         iv.      Goodwill is to be valued at three years purchase of super profit.  [Ans. Rs. 35,400]

6.       Following is the Balance Sheet of Mr. Atul as on 31st March, 1993:
Liabilities
Amount
Assets
Amount
Capital
General Reserve
Creditors
Bills Payable
77,500
22,500
40,000
5,000
Fixed Assets
Current Assets
Prepaid Advertisement

85,000
50,000
10,000
1,45,000
1,45,000
                The net profits for the last three years were Rs. 19,500; Rs. 22,500; Rs. 30,000.
                Calculate the value of goodwill at two times of super profit, taking into consideration the standard rate of return on the capital employed is 15%.                       [Ans. Rs. 21,000]

IMPORTANT POINTS TO REMEMBER
1.      Any Number which is followed by the word Years Purchase / Times / Thrice / Twice are considered as number of years purchase.
2.      If Number of Years of purchase is not given then assume it as 1 years purchase.
3.      If there is a continuous loss in the Firm then the Good will of the Firm would be Zero (0).   
4.      If the total Profits/ Loss are negative then also the goodwill will be Zero.
                     Note : Capital Employed = Partners’ Capital + General Reserve + Accumulated Profit – Unadjusted losses – Expenses yet to be written off.