### GOODWILL QUESTIONS AND THEIR SOLUTIONS

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]

SOLUTION:
M/S _________________________________
VALUATION OF GOODWILL
AVERAGE PROFIT METHOD

GOODWILL = (AVERAGE PROFIT) (NUMBER OF YEARS PURCHASE)

WHERE : AVERAGE PRFIT =
=

GOODWILL  = 16000

 GOODWILL = 16000

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]

SOLUTION:
M/S MONA, REENA & SONA CO
VALUATION OF GOODWILL
AVERAGE PROFIT METHOD

GOODWILL = (AVERAGE PROFIT) (NUMBER OF YEARS PURCHASE)

WHERE : AVERAGE PRFIT =
=

GOODWILL  = 8000

 GOODWILL = Rs. 24000

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, [Ans.  Rs. 95,000]
 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)

SOLUTION:
M/S _________________________________
VALUATION OF GOODWILL
AVERAGE PROFIT METHOD

GOODWILL = (AVERAGE PROFIT) (NUMBER OF YEARS PURCHASE)

WHERE : AVERAGE PRFIT =
=

GOOD WILL

 GOODWILL  = Rs. 95000

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. [Ans. Rs. 27,000]
 1st Year Rs, 10,000(Profit) 2nd Year Rs, 12,000(Profit) 3rd Year Rs, 4,000(Loss) 4th Year Rs, 18,000(Profit)

SOLUTION:
M/S ___________________________________
VALUATION OF GOODWILL
AVERAGE PROFIT METHOD

GOODWILL = (AVERAGE PROFIT) (NUMBER OF YEARS PURCHASE)

WHERE : AVERAGE PRFIT =
=

GOODWILL  = 9000

 GOODWILL = Rs. 27000
5.      The profit of a firm for the four years from 1991 to 1994 where_  [Ans. Rs. 1, 02,000]
 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.

SOLUTION:
M/S ______________________________________
VALUATION OF GOODWILL
AVERAGE PROFIT METHOD

GOODWILL = (AVERAGE PROFIT) (NUMBER OF YEARS PURCHASE)

WHERE : AVERAGE PRFIT =
=

GOODWILL  = 51000

 GOODWILL =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]

SOLUTION:
M/S X Co.
VALUATION OF GOODWILL
AVERAGE PROFIT METHOD

GOODWILL = (AVERAGE PROFIT) (NUMBER OF YEARS PURCHASE)

WHERE : AVERAGE PRFIT =
=

GOODWILL  = 99820

 GOODWILL = Rs. 299460

7.      Good will is valued at three years purchase of last five years average profit. The profits for the last five years are.        [Ans. 0]
 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)
Note: - Since the company’s average profit is negative. Therefore the firm’s goodwill is zero.
SOLUTION:
M/S ______________________________________
VALUATION OF GOODWILL
AVERAGE PROFIT METHOD

GOODWILL = (AVERAGE PROFIT) (NUMBER OF YEARS PURCHASE)

WHERE : AVERAGE PRFIT =
=

GOODWILL  = 0
 GOODWILL = 0

Note: Since the company’s Average profit is negative therefore, the firms 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_ [Ans. Rs. 26,400]
 1st Year 5,800 2nd Year 7,400 3rd Year 20,000 4th Year 3,500 5th Year 7,300

SOLUTION:
M/S ______________________________________
VALUATION OF GOODWILL
AVERAGE PROFIT METHOD

GOODWILL = (AVERAGE PROFIT) (NUMBER OF YEARS PURCHASE)

WHERE : AVERAGE PRFIT =
=

GOODWILL  = 8800
 GOODWILL = 26400

9.      A firm with an average capital employed of R s. 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]

M/S ______________________________________
VALUATION OF GOODWILL
SUPER PROFIT METHOD

GOODWILL = (SUPER PROFIT) (NUMBER OF YEARS PURCHASE)
WHERE : - SUPER PROFIT = AVERAGE PROFIT – NORMAL PROFIT - REMUNERATION
WHERE : AVERAGE PRFIT =
=          Rs. 40000
WHERE: NORMAL PROFIT  = CAPITAL EMPLOYED N.R.R.
NORMAL PROFIT = 160000 15 %
NORMAL PROFIT = Rs. 24000
WHERE: REMUNERATION  = Rs. NIL

SUPER PROFIT = 40000-24000-NIL
GOODWILL  = 16000
 GOODWILL = Rs. 48000

10.Capital employed on 31st December, 1990 was Rs, 1, 00,000/-. The Profits earned by the business for the last 5 years where. [Ans. Rs. 87,000]
 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.
M/S ______________________________________
VALUATION OF GOODWILL
SUPER PROFIT METHOD
GOODWILL = (SUPER PROFIT)  (NUMBER OF YEARS PURCHASE)
WHERE : - SUPER PROFIT = AVERAGE PROFIT – NORMAL PROFIT - REMUNERATION
WHERE : AVERAGE PRFIT =
=
=
=          Rs. 44000
WHERE: NORMAL PROFIT  = CAPITAL EMPLOYED N.R.R.
NORMAL PROFIT = 100000 15 %
NORMAL PROFIT = Rs. 15000
WHERE: REMUNERATION  = Rs. NIL
SUPER PROFIT = 44000-15000-NIL
GOODWILL  = 29000
 GOODWILL = Rs. 87000

11.  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]

M/S ______________________________________
VALUATION OF GOODWILL
SUPER PROFIT METHOD
GOODWILL = (SUPER PROFIT)  (NUMBER OF YEARS PURCHASE)
WHERE : - SUPER PROFIT = AVERAGE PROFIT – NORMAL PROFIT - REMUNERATION
WHERE : AVERAGE PRFIT =
=
=
=          Rs. 68000
WHERE: NORMAL PROFIT  = CAPITAL EMPLOYED N.R.R.
NORMAL PROFIT = 100000 10 %
NORMAL PROFIT = Rs. 10000
WHERE: REMUNERATION  = Rs. NIL
SUPER PROFIT = 68000-10000-NIL
GOODWILL  = 58000
 GOODWILL = Rs. 116000

12. 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]

M/S XYZ CO
VALUATION OF GOODWILL
SUPER PROFIT METHOD
GOODWILL = (SUPER PROFIT)  (NUMBER OF YEARS PURCHASE)
WHERE : - SUPER PROFIT = AVERAGE PROFIT – NORMAL PROFIT - REMUNERATION
WHERE : AVERAGE PRFIT =
=
=
=          Rs. 10000
WHERE: NORMAL PROFIT  = CAPITAL EMPLOYED N.R.R.
NORMAL PROFIT = 15000 15 %
NORMAL PROFIT = Rs. 7500
WHERE: REMUNERATION  = Rs. 500
SUPER PROFIT = 10000-7500-500
GOODWILL  = 2000
 GOODWILL = Rs. 4000

13. M/s Vijay trading company earned net profit during the last four years was follows.
 1st Year 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.

M/S VIJAY CO
VALUATION OF GOODWILL
SUPER PROFIT METHOD
GOODWILL = (SUPER PROFIT)  (NUMBER OF YEARS PURCHASE)
WHERE : - SUPER PROFIT = AVERAGE PROFIT – NORMAL PROFIT - REMUNERATION
WHERE : AVERAGE PRFIT =
=
=
=          Rs. 55000
WHERE: NORMAL PROFIT  = CAPITAL EMPLOYED N.R.R.
NORMAL PROFIT = 150000 20 %
NORMAL PROFIT = Rs. 30000
WHERE: REMUNERATION  = Rs. 500
SUPER PROFIT = 55000-30000-6000
GOODWILL  = 19000
 GOODWILL = Rs. 38000

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