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  201314  1415  1516  1617  1718 
₹ (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 
201314  15,000 
1415  16,500 
1516  11,000 
1617  17,000 
1718  16,000 
Total Profit  75,500 
Average profit for 5 years = 75,500 / 5 = 15,100
Calculation of profit for 4 years:
Year  Profit 
201415  16,500 
1516  11,000 
1617  17,000 
1718  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 nonrecurring  –  Abnormal gain nonrecurring  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  201415  201516  201617  201718 
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 201516 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 201516, 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  201415  201516  201617  201718 
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 201617
Note 2
Sale proceeds incorrectly credited in 201516 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 201718, the enterprise earned a profit of ₹. 2,00,000/. Compute the value of goodwill of the enterprise by capitalization method of superprofits 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.