# TS Grewal Solutions Class 12 Accountancy Vol 1 Chapter 3

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## TS Grewal Solutions for Class 12 Accountancy Chapter 3- Goodwill- Nature and Valuation

Question 1

The gains for the 5 years on March 31st are mentioned below:

• 2014 – ₹. 5,00,000/-
• 2015 – ₹. 4,00,000/-
• 2016 – ₹. 6,00,000/-
• 2017 – ₹. 4,50,000/-
• 2018 – ₹. 6,00,000/-

Now, compute the goodwill of the enterprise on the basis of 4 years purchase of 5 years profit.

Solution:

Goodwill = Average Profits × Number of years of purchase

Now, Average Profits = Total Profits / Number of years

Average Profits = 5,00,000 + 4,00,000 + 6,00,000 + 4,50,000 + 6,00,000 / 5

= 5,10,000

Therefore, goodwill = 5,10,000 X 4 = ₹. 20,40,000/-

Question 2

Compute the value of the firm’s goodwill on the basis of 18 months or a and half years purchase of the average gains of previous 3 years. The profit for the 1st year was ₹.1,50,000/-, profit for the 2nd year was twice the profit of the 1st year and the 3rd year profit was 1.5 times of the profit of the 2nd year.

Solution:

Goodwill=Average Profits × Number of years of purchase

Goodwill = 3,00,000 X 1.5 = ₹. 4,50,000/-

Working Notes –

Calculation of profits (Previous 3 years)

 Year Profit 1st 1,50,000 2nd 1,50,000 X 2 = 3,00,000 3rd 3,00,000 X 1.5 = 4,50,000 TOTAL 9,00,000

Calculation of average profits

Average profits = Total Profits for the previous years / Number of years = 9,00,000 / 3

Therefore, Average profits = 3,00,000

Question 3

P and Q are partners in an enterprise, sharing profits and losses in the ratio of 3:2. Now, they decided to admit R into the partnership for 1/4th share on 1st of April, 2018. For this Objective, Goodwill is to be valued 4 times the average annual profit of the last 4 or 5 years whichever is higher. The agreed points for goodwill purpose of the past 5 years are as follows:

 Year 2013-14 14-15 15-16 16-17 17-18 ₹ (Profits) 15,000 16,500 11,000 17,000 16,000

Solution:

Computation of Goodwill:

Goodwill = Average profit X number of years’ purchase

= 15,125 X 4 = ₹. 60,500/-

Working Notes –

Calculation of profit for 5 years:

 Year Profit 2013-14 15,000 14-15 16,500 15-16 11,000 16-17 17,000 17-18 16,000 Total Profit 75,500

Average profit for 5 years = 75,500 / 5 = 15,100

Calculation of profit for 4 years:

 Year Profit 2014-15 16,500 15-16 11,000 16-17 17,000 17-18 16,000 Total Profit 60,500

Average profit for 4 years = 60,500/4 = ₹. 15,125/-

Average profits (4 years) > Average profits (5 years)

Accordingly, for goodwill valuation, average profits are ₹. 15,125/-

Question 4

Claire and Sophie are the partners sharing profits in the ratio of 3:4. They ascertained to admit Sharon as a partner from the 1st of April, 2018 on the following terms:

• Sharon will be given a 2/5th share of the profit
• Goodwill of the enterprise is valued at 2 years purchase of 3 years normal average profit of the enterprise. Gains of the previous 3 years ended March 31st were:
• 2018 – Profit – ₹. 50,000/- (after debiting a loss of stock by fire ₹. 60,000/-)
• 2017 – Loss – ₹. 1,00,000/- (involves voluntary retirement compensation pain ₹. 1,30,000/-)
• 2016 – Profit of ₹. 1,30,000/- (including the gain of ₹. 50,000/- on the sale of fixed assets)

Now, evaluate the Goodwill.

Solution:

Goodwill = Normal average profit X Number of years of purchase

= Normal average profit = ₹. 73,333/-

Number of years of purchase = 2

Therefore, Goodwill = 73,333 X 2 = 1,46,666/-

Working Notes –

 Year Actual Profit plus Abnormal loss non-recurring – Abnormal gain non-recurring equals Normal Profit 2018 50,000 plus 60,000 – Nil equals 1,10,000 2017 (1,00,000) plus 1,30,000 – Nil equals 30,000 2016 1,30,000 plus Nil – 50,000 equals 80,000 Normal profits for the last 3 years 2,20,000

Normal average profit = Normal profit for last 3 years / 3

= 2,20,000 / 3 = ₹. 73,333/-

Question 5

Profits of a form for the year ended March 31st, for the last 5 years were –

 Year ended 31st March 2014 31st March 2015 31st March 2016 31st March 2017 31st March 2018 ₹ (Profits) 30,000 34,000 40,000 35,000 28,000

Now, compute the value of goodwill on the basis of 3 years purchase of weighted average profit after assigning weights 1,2,3,4 and 5 respectively to the profits for the years ended 31st March – 2014, 2015, 2016, 2017 and 2018.

Solution:

Goodwill = Weighted average profit X Number of years purchase

= 33,200 X 3 = ₹. 99,600/-

Working Notes –

 Year Profit X Weight equal Product 2014 30,000 X 1 equal 30,000 2015 34,000 X 2 equal 68,000 2016 40,000 X 3 equal 1,20,000 2017 35,000 X 4 equal 1,40,000 2018 28,000 X 5 equal 1,40,000 15 4,98,000

Weighted Average Profit = Total product of profits / Total number of weights

= 4,98,000/15

= ₹. 33,200/-

Question 6

Compute the goodwill of an enterprise on the basis of 3 years purchase of the weighted average profit of the last 4 years. The appropriate weights to be used and the profits are:

 Year 2014-15 2015-16 2016-17 2017-18 Profit in ₹ 1,11,000 1,34,000 1,10,000 1,50,000 Weight 1 2 3 4

On the analysis of accounts, the following matters are disclosed:

• On December 1st, 2016, a major repair was made in respect with the plant incurring ₹. 40,000/- which was charged to the revenue.
• The closing stock for the year 2015-16 was overvalued by ₹. 22,000/-.
• To cover management cost, an annual charge of ₹. 34,000/- must be made for the purpose of goodwill valuation.
• In 2015-16, a machine possessing a book value of ₹. 20,000/- was sold @ ₹. 21,000/-, but the proceeds were incorrectly credited to the Profit and Loss account. No effect has been given to rectify the same. Depreciation is charged on the machine @ 10% per annum on reducing balance method.

Solution:

 Particulars 2014-15 2015-16 2016-17 2017-18 Profits 1,11,000 1,34,000 1,00,000 1,50,000 Repair capitalized +40,000 Depreciation -1,333 -3,866 Overvaluation of closing stock -22,000 22,000 Management cost -34,000 -34,000 -34,000 -34,000 Sale proceeds -20,000 Adjusted profits 77,000 78,000 1,26,667 1,21,134 Weights 1 2 3 4 Product 77,000 1,56,000 3,80,001 4,48,536

Working Notes –

Goodwill = Weighted average profit X Number of years purchase

Weighted average profit = Total of product / Total of weights

= 77,000 + 1,56,000 + 3,80,001 + 4,48,536 / 10

= 1,06,153

Therefore, Goodwill = 1,06,153 X 3 = ₹. 3,18,459/-

Note 1

Depreciation on ₹. 40,000/- machinery is charged for only 4 months on the year 2016-17

Note 2

Sale proceeds incorrectly credited in 2015-16 have been deducted after adjusting for the profit of ₹. 1,333/-. No depreciation is charged, since date of sale is not given (presumed that the machinery is sold during the end of the year)

Question 7

The average net profit in the future by ABC enterprise in ₹. 50,000/- per annum. Average capital employed in the business by the enterprise is ₹. 3,00,000/-. The normal rate of return from the capital invested in this class of business is 10%. Remuneration of the partners is estimated to be @ ₹. 5,000/- per annum. Find out the value of goodwill on the basis of 2 years purchase of super profit.

Solution:

Goodwill = Super profit X number of years purchase

Normal profit = Expected capital employed X Normal rate of return / 100

= 3,00,000 X 10/100 = 30,000/-

Actual expected profit = 50,000 – 5,000 = 45,000/-

Super profit = Actual expected profit – Normal expected profit

Super profit = 45,000 – 30,000 = 15,000/-

Number of years of purchase = 2

Super profit = 15,000/-

Therefore, goodwill = Super profit X Number of years of purchase

Hence, goodwill = 15,000 X 2 = ₹. 30,000/-

Question 8

Maaya and Maanav are partners in an enterprise and they admit Jai into the partnership with effect from 1st of April, 2018. They agreed to value goodwill at 3 years purchase of super profit method for which the determined to an average profit of the last 5 years. The profit for the last 5 years was:

 Year ended Net Profit (₹) 31st March 2014 1,50,000 31st March 2015 1,80,000 31st March 2016 1,00,000 Including the abnormal loss ₹. 1,00,000/- 31st March 2017 2,60,000 Including the abnormal gain ₹. 50,000/- 31st March 2018 2,40,000

The enterprise has total assets of ₹.25,00,000/- and outside liabilities of ₹. 10,00,000/- as on that date. The normal rate of return in a similar business is 10%. Compute the value of goodwill.

Solution:

Calculation of Normal Profits (31st March)

 Years 2014 2015 2016 2017 2018 Profit and Loss 1,50,000 1,80,000 1,00,000 2,60,000 2,40,000 Adjustments – – 1,00,000 -50,000 – Normal Profit 1,50,000 1,80,000 2,00,000 2,10,000 2,40,000
• Total Normal Profit:

1,50,000 + 1,80,000 + 2,00,000 + 2,10,000 + 2,40,000

= ₹. 9,80,000/-

• Calculation of capital employed:

Calculation of capital employed = Total assets – Outside Liabilities

Calculation of capital employed = 25,00,000 – 10,00,000

Calculation of capital employed = ₹. 15,00,000/-

• Calculation of Super Profits:

Average Profit = Total profit of the previous years / Number of years

Average Profit = 9,80,000/5

Average Profit = 1,96,000

Normal Profit = Capital employed X Normal rate of returns / 100

15,00,000 X 10/100 = ₹. 1,50,000/-

Super profit = Average profit – Normal profit

Super profit = 1,96,000 – 1,50,000 = 46,000

Goodwill = Super profit X Number of years of purchase

Therefore, Goodwill = 46,000 X 3 = ₹. 1,38,000/-

Question 9

From the following data, compute the value of goodwill of the enterprise by applying Capitalization Method: Total capital of the enterprise – ₹. 20,00,000/-. Normal rate of return – 10%. Profit of the year – ₹. 3,00,000/-.

Solution:

Goodwill = Capitalized value of profit – Actual Capital

Capitalized value of profit = Profit X 100 / Net rate of return

= 3,00,000 X 100/10 = 30,00,000/-

Total Capital = ₹. 20,00,000/-

Therefore, Goodwill = 30,00,000 – 20,00,000

Goodwill = ₹. 10,00,000/-

Question 10

X and Y are partners in an enterprise. Their capitals were, X – ₹. 4,00,000, Y – ₹. 3,00,000/-. During the year 2017-18, the enterprise earned a profit of ₹. 2,00,000/-. Compute the value of goodwill of the enterprise by capitalization method of super-profits assuming that the normal rate of return is 20%.

Solution:

Goodwill = Super profit X 100 / Normal rate of return

Super Profits = Average profit – Normal Profit

Average Profit = 2,00,000 (given)

Normal profit = Capital employed X Normal rate of return

Normal profit = [4,00,000+3,00,000] X 20%

Normal profit = 7,00,000 X 20%

Normal profit = 1,40,000/-

Super Profit = 2,00,000 – 1,40,000 = 60,000/-

Goodwill = 60,000 X 100/20 = 3,00,000/-

Question 11

On 1st April 2018, a firm had assets of ₹3,00,000 including cash of ₹5,000. The partners’ capital accounts showed a balance of ₹2,00,000 and the reserve constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at ₹2,00,000 at four years’ purchase of super profit, find the average profit of the firm.

Solution:

Goodwill = Super Profit x Number of Years’ Purchase

₹2,00,000 = Super Profit x 4

Super Profit = 2,00,000 / 4 = 50,000

Normal Profit = Capital Employed x Normal Rate of Return/100

= ₹ 3,00,000 x 10/100 = ₹30,000

Super Profit = Average Profit – Normal Profit

₹50,000 = Average Profit – ₹30,000

Average Profit = ₹50,000 + ₹30,000 = ₹80,000

Note: As outside liabilities are not given it is assumed to be nil. Thus, capital employed is equal to total assets.