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.
Solution: Valuation of Goodwill (Average Profit Method)
Goodwill = Average Profit × Number of Years Purchase
Step 1: Calculate Average Profit
Total Profit = 20,000 + 16,000 + 24,000 + 8,000 + 12,000 = Rs. 80,000
Average Profit = Total Profit / 5 = 80,000 / 5 = Rs. 16,000
Step 2: Calculate Goodwill
(Assuming 1 year purchase as not explicitly specified)
Goodwill = 16,000 × 1 = 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 Rs. 15,000, 3rd Year Rs. 8,000(Loss), 4th Year Rs. 7,000, 5th Year Rs. 10,000.
Solution: Valuation of Goodwill (Average Profit Method)
Goodwill = Average Profit × Number of Years Purchase
Step 1: Calculate Average Profit
Total Profit = 16,000 + 15,000 - 8,000 (Loss) + 7,000 + 10,000 = Rs. 40,000
Average Profit = Total Profit / 5 = 40,000 / 5 = Rs. 8,000
Step 2: Calculate Goodwill
Goodwill = 8,000 × 3 = 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)
Solution: Valuation of Goodwill (Average Profit Method)
Goodwill = Average Profit × Number of Years Purchase
Step 1: Calculate Average Profit
Total Profit = 40,000 + 60,000 - 10,000 (Loss) + 50,000 - 30,000 (Loss) + 80,000 = Rs. 1,90,000
Average Profit = Total Profit / 6 = 1,90,000 / 6 = Rs. 31,666.67
Step 2: Calculate Goodwill
Goodwill = 31,666.67 × 3 = 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)
Solution: Valuation of Goodwill (Average Profit Method)
Goodwill = Average Profit × Number of Years Purchase
Step 1: Calculate Average Profit
Total Profit = 10,000 + 12,000 - 4,000 (Loss) + 18,000 = Rs. 36,000
Average Profit = Total Profit / 4 = 36,000 / 4 = Rs. 9,000
Step 2: Calculate Goodwill
Goodwill = 9,000 × 3 = 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.
Solution: Valuation of Goodwill (Average Profit Method)
Goodwill = Average Profit × Number of Years Purchase
Step 1: Calculate Average Profit (Last 3 Years Only)
Total Profit (1992, 1993, 1994) = 45,000 + 55,000 + 53,000 = Rs. 1,53,000
Average Profit = Total Profit / 3 = 1,53,000 / 3 = Rs. 51,000
Step 2: Calculate Goodwill
Goodwill = 51,000 × 2 = 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.
Solution: Valuation of Goodwill (Average Profit Method)
Goodwill = Average Profit × Number of Years Purchase
Step 1: Calculate Average Profit
Total Profit = 1,05,800 + 1,02,600 + 98,400 + 96,800 + 95,500 = Rs. 4,99,100
Average Profit = Total Profit / 5 = 4,99,100 / 5 = Rs. 99,820
Step 2: Calculate Goodwill
Goodwill = 99,820 × 3 = 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)
Solution: Valuation of Goodwill (Average Profit Method)
Step 1: Calculate Average Profit
Total Profit = 4,800 - 7,200 (Loss) - 10,000 (Loss) + 3,000 - 5,000 (Loss) = Rs. -14,400
Average Profit = -14,400 / 5 = Rs. -2,880
Conclusion:
Since the company’s average profit is negative, the firm's goodwill cannot be realized. Therefore, Goodwill = 0.
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
Solution: Valuation of Goodwill (Average Profit Method)
Goodwill = Average Profit × Number of Years Purchase
Step 1: Calculate Average Profit
Total Profit = 5,800 + 7,400 + 20,000 + 3,500 + 7,300 = Rs. 44,000
Average Profit = Total Profit / 5 = 44,000 / 5 = Rs. 8,800
Step 2: Calculate Goodwill
Goodwill = 8,800 × 3 = Rs. 26,400
9. 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%.
Solution: Valuation of Goodwill (Super Profit Method)
Goodwill = Super Profit × Number of Years Purchase
Super Profit = Average Profit − Normal Profit − Remuneration
Step 1: Identify Average Profit
Average Profit = Rs. 40,000
Step 2: Calculate Normal Profit
Normal Profit = Capital Employed × Normal Rate of Return (NRR)
Normal Profit = 1,60,000 × 15% = Rs. 24,000
Step 3: Calculate Super Profit
Remuneration = Rs. 0 (Nil)
Super Profit = 40,000 − 24,000 − 0 = Rs. 16,000
Step 4: Calculate Goodwill
Goodwill = 16,000 × 3 = Rs. 48,000
10. 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.
Solution: Valuation of Goodwill (Super Profit Method)
Goodwill = Super Profit × Number of Years Purchase
Super Profit = Average Profit − Normal Profit − Remuneration
Step 1: Calculate Average Profit
Total Profit = 30,000 + 40,000 + 50,000 + 40,000 + 60,000 = Rs. 2,20,000
Average Profit = Total Profit / 5 = 2,20,000 / 5 = Rs. 44,000
Step 2: Calculate Normal Profit
Normal Profit = Capital Employed × Normal Rate of Return (NRR)
Normal Profit = 1,00,000 × 15% = Rs. 15,000
Step 3: Calculate Super Profit
Remuneration = Rs. 0 (Nil)
Super Profit = 44,000 − 15,000 − 0 = Rs. 29,000
Step 4: Calculate Goodwill
Goodwill = 29,000 × 3 = Rs. 87,000
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%.
Solution: Valuation of Goodwill (Super Profit Method)
Goodwill = Super Profit × Number of Years Purchase
Super Profit = Average Profit − Normal Profit − Remuneration
Step 1: Calculate Average Profit
Total Profit = 60,000 + 55,000 + 75,000 + 85,000 + 65,000 = Rs. 3,40,000
Average Profit = Total Profit / 5 = 3,40,000 / 5 = Rs. 68,000
Step 2: Calculate Normal Profit
Normal Profit = Capital Employed × Normal Rate of Return (NRR)
Normal Profit = 1,00,000 × 10% = Rs. 10,000
Step 3: Calculate Super Profit
Remuneration = Rs. 0 (Nil)
Super Profit = 68,000 − 10,000 − 0 = Rs. 58,000
Step 4: Calculate Goodwill
Goodwill = 58,000 × 2 = Rs. 1,16,000
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.
Solution: Valuation of Goodwill (Super Profit Method)
Goodwill = Super Profit × Number of Years Purchase
Super Profit = Average Profit − Normal Profit − Remuneration
Step 1: Calculate Average Profit
Total Profit = 7,000 + 13,000 + 12,000 + 8,000 = Rs. 40,000
Average Profit = Total Profit / 4 = 40,000 / 4 = Rs. 10,000
Step 2: Calculate Normal Profit
Normal Profit = Capital Employed × Normal Rate of Return (NRR)
Normal Profit = 50,000 × 15% = Rs. 7,500
Step 3: Calculate Super Profit
Remuneration = Rs. 500 p.a.
Super Profit = 10,000 − 7,500 − 500 = Rs. 2,000
Step 4: Calculate Goodwill
Goodwill = 2,000 × 2 = Rs. 4,000
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 2 years purchase of Average Super profit of above mentioned period.
Solution: Valuation of Goodwill (Super Profit Method)
Goodwill = Super Profit × Number of Years Purchase
Super Profit = Average Profit − Normal Profit − Remuneration
Step 1: Calculate Average Profit
Total Profit = 57,000 + 44,000 + 61,000 + 58,000 = Rs. 2,20,000
Average Profit = Total Profit / 4 = 2,20,000 / 4 = Rs. 55,000
Step 2: Calculate Normal Profit
Normal Profit = Capital Employed × Normal Rate of Return (NRR)
Normal Profit = 1,50,000 × 20% = Rs. 30,000
Step 3: Calculate Super Profit
Remuneration = Rs. 500 per month = 500 × 12 = Rs. 6,000 p.a.
Super Profit = 55,000 − 30,000 − 6,000 = Rs. 19,000
Step 4: Calculate Goodwill
Goodwill = 19,000 × 2 = Rs. 38,000