Average Profit Method

1. The goodwill of a firm is estimated at two years' purchase of the average profit of the last 5 years
which are as follows: 2012: 25,000; 2013:* 45,000; 2014:* 27,000 (Loss); 2015: 35,000 and
2016: 40,000. Calculate goodwill.
{Goodwill=47,200}
2. Calculate goodwill at one and half years' purchase of the average profit of last 5 years. The firm
earned profit during the first three years as 30,000, * 28,000 and R 20,000 and suffered losses
of ?5,000 and6,000 in the last two years.
(Goodwill = 20, 100}
3. Compute the value of goodwillon the basis of four years' purchase of the average profits based
as follows:
on the last five years. The profits for the last five years were (NCERT}
2003 2004 2005 2006
Year 2002
60,000
50,000 50,000 60,000
Profit (3) 40,000
(Goodwill = 2,08,000}
3 years' profit. The
4. Goodwill is to be calculated at two years' purchase of the average of the last
profit of the first vear was 10,000, profit for second year Was twice the profit of the first year and
the profit of the second year.
Inthe third vear. profit was one and half times of
{Goodwill = *40,000}
1,00,000. The net profits for the last
D. The total capitalof the firm of Saurabh, Mohit and NiknlWas
52,000. There was an abnormal
3 years were: 2013-1440,000;2014-1546,000 and 201b-16
years' purchase of the average
loss of 3.000 in 2014-15. Goodwill of the firm was to be valUed at 2
goodwill of the firm. {CBSE, All lndia Comptt. 2017}
Proits of last three vears. Calculate the
{Goodwill = 94,000}
 2.28
Accountancy for Class XI
6. The goodwil of afirm is estimated attwo years' purchase of the average profit of the last 5 years.
If goodwill of the firm is determined at 1,24,200 and profits orlosses of lastt4 yearS 0S given as:
2015
Year 2012 2013
2014 2016
70,000
Profit () ? 40,000 {Loss) 92,000 55,000
Calculate profit or loss earned by the firm in the year 2012.
(Profit of Year 2012=1,33,500)
annual profits of the previous thr
7. The goodwill of a firm is to be valued at 60% of the average
whichever is higher. The average profits for the purpose of goodwill for the past foe
or four years,
years were:
2013-14 2014-15 2015-16 2016-17
Year
Profit () 30,000 45,000 27,000 36,000
Calculate the value of goodwill.
{Goodwill R21,600)
8. Ram and Shyam are partners in a firm sharing profits and losses in the ratio of 2:1.They decide to
take Hari into partnership for Vath share. For this purpose, goodwill of the firm is to be valued at 70%
of the average annualprofits of the previous three or four years, whichever is higher. The average
profits for the last four years are:
Year 2013-14 2014-15 2015-16 2016-17
Profit () 1,25,000 80,000 70,000 90,000
Determine the value of Goodwill.
(Goodwill = T63,875)
9. Aand Bare partners sharing profits and losses in the ratio of 2:1. They admit C for sth share. For
this purpose, the goodwill of the firm is to be valued on the basis of 3 years' purchase of last 5years
average profits.
Year 2012 2013 2014 2015 2016
Profit () 50,000 60,000 40,000 65,000 80,000
The profit of 2014 was calculated after charging5,000 for loss of goods by fire. Calculate goodWl
of the fim.
{Goodwill =71,80,000}
10. The Profits of firm for the last five years were as
follows:
Year 2002-03 2003-04 2004-05 2006-07
2005-06
Profit ) 20,000 24,000 30,000 25,000 18,000
Calculate the value of goodwill on the basis of three years' purchase of
based on weights 1,2,3, 4 and 5 respectively to the profits for weighted average p
2002, 2003. 2004, 2005 and
{NCERT)
(Goodwill = 769,600}
11. Calculate goodwill of a firm on the basis of three year
the last four years. The profit of the last four years purchase of the weighted average prote
were:
Year 2003 2004 2006
2005
Profit () 20,200 24,800 20,000 30,000
The weights assigned to each year are:2003: 1;2004: 2; 2005:3 and 2006: 4.You are Suppliedthe
following information:
() On 15t September, 2005, a major plant repair was undertaken for 6,000, which was charged
torevenue. The said sumis to be capitalised for goodwillcalculation subject to adjustmentof
depreciation of 10% p.a. on reducing balance method.
Goodwill: Nature and Valuation 2.29

(i) The Closing Stock for the year 2004 was

overvalued by 2,400.
(ii) To COver management cost, an annual charge of 4.80o should be made for purp0se or
goodwill valuation (NCERT)
(Goodwill = 65,784]
Super Profit Method
12. Capital employed in a business is 2,00,000. The normal rate of return on capital employedis
15%. During the year 2002, the firm earned a profit of 48,000. Calculate goodwll on the basis of
3years' purchase of super profit? (NCERT)
{Goodwill = 54,000}
13. Capital of the firm of Sharma and Verma is2,00.,000 and the market rate of interest is 15%. Annual
salary topartners is? 12,000 each. The profits for the last three years were60,000;72,000 and
84,000. Goodwill is to valued at 2 years' purchase of last 3 years' average super profit. Calculate
goodwill of firm. {CBSE, Delhi Compt. 2013 (|)}
{Goodwill = 36,000}
14. The books of Ram and Bharat showed that the capital employed on 31.12.2002 was? 5,00,000
and the profits for the last 5 years:
Year 2002 2003 2004 2005 2006
Profit () 40,000 50,000 55,000 70,000 85,000
Calculate the value of goodwill on the basis of 3years' purchase of the average super profits of the
last 5 years assuming that the normal rate of return is 10%. (NCERT}
{Goodwill=730,000}
15. Afirmearned profits of 80,000, 1,00,000, 1,20,000 and 1,80,000 during 2010-11, 2011-12,
2012-13 and 2013-14 respectively. Thefirm has capital investment ofT 5,00,000. Afair rate of return
on investment is 15% p.a. Calculate goodwill of thefirm based on three years' purchase of average
super profits of last four years. {CBSE, Sample Paper 2015}
{Goodwill = 1,35,000}
16. The average profit earned by a firm is? 80,000, which includes undervaluation of stock of 8.000
on an average basis. The capital invested in the business is? 8,00,000 and the normal rate of return
is 8%.Calculate goodwill of the firm on the basis of 7 times the super profit.
{CBSE, Delhi Compt. 2015 (0)}
{Goodwill = 1,68,000}
17. The average profit earned by a firm is ? 2,50,000, which includes overvaluation of stock of
7 10,000on an average basis. The capital invested in the business is 14,00,000 and the normal
rate of return is 15%. Calculate goodwill of the firm on the basis of 4 times the super profit.
{CBSE, All India Comptt. 2015 (l|l)}
{Goodwil= 1,20, 000}
18. On 1st April. 2017.a firm had total assets of ? 3,00,000 excluding cash of ? 70,000. Partners' Capital
Accounts showed a balance of 2,30,000. The current liabilities were 50,000 and the balance
constituted the reserves. If the normal rate of return is 12% and goodwill of the firm is valued at
1,20,000 atthreeyears of purchase of super profit, find the average profit of the firm.
(Average Profit=78,400)
19.The total capital ofthefirm of Sakshi, Mehak and Megha is? 1,00,000 and the market rate of interest
is 15%.The net profits forthe last 3years were 30,000; *36,000 and 42,000. Goodwillis to be
valued at 2years' purchase of the last 3years' super profits. Calculate the goodwillof the firm.
{CBSE, Delhi Comptt. 2017}
fGoodwill=42,000}
 2.30
Accountancy for Class XI
Capitallsation Method
1,00,000 during the last tew years. Find out theanval
20. A business has earned average profits of 10,00.000
goodwill by capitalisation method, given that the assets of the business are
of of return is 10%.
external liabilities are 1.50,000. The normal rate
(Goodwill = 1,50,000)
can be calculated by either Capitaliset
Hint: In the absence of anyspecific information, Goodwill
Profit Method' as both the methods oive "
of Average Profit Method' or Capitalisation of Super
Same answer.

21. Jand K are partners in a firm. Their capitals are: JR 3,00,000 and K? 2,00,000. During the Ver
AsSuming that the normal rate of return ie
ended 30.03.2010the firm earned a profit of 1,50,000.
20%, calculate the value of goodwill of the firm:
() By Capitalisation Method and
super profit.
(ü) Super Profit Method if the goodwill is valued at 2 years' purchase of
{CBSE, Foreign 2011)
{) Goodwill =2,50,000: (i) 1,00,000)
years and the normal rate
22. A business has earned average profit of ? 4,00,000 during the last fewW
of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method, and
(ii) Super Profit method if the goodwill is valued at 3 years' purchase of super profits.
Assets of the business were 40,00,000 and it external liabilities 7,20,000.
fCBSE, DelhiComptt. 2013 ()
{0) Goodwill = 7,20,000; (i) 2, 16,000}
23. A partnership firm earned net profits during the last three years as follows:
Year 2007-08 2008-09 2009-10

1,90,000 2,20,000 2,50,000

Profit ()
The capital ernployed in the firm throughout the above mentioned period has been 4,00,000. Having
regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration
of allthe partners during this period is estimated to be 1,00,000 per annum. Calculate the value
of goodwill on the basis of:
() two year's purchase of super profits earned on average basis during the above mentioned
three years; and
(i) by Capitalisation Method. {CBSE, Al India 2011)
{() Goodwill=1,20,000; (ü) 4,00,000}
24. Calculate goodwill in the followingcases:
(() The goodwill of a firm is to be worked out at three years' purchase of the average protits o
the last five years which are as follows:
Year 2002 2003 2004 2005 2006

10,000 15,000 4,000 5,000 {Loss) 6,000

Profit ()
(1) The capital employed of the firm is 1,00,000 and normal rate of return is 8%, the averag
profits forlast 5 years are 12,000 and goodwillis to be worked out at 3 years' purchase
super profits,
normal
(ii) Rama Brothers earn an average profit of 30,000 with a capital of 2,00,(000. TheWork out
rate of return in the business is 10%. Using capitalisation of super profits method, (NCERT)
the value the goodwill of the firm. 12,000:
{() Average Profit Method = 18,000: (ü) Super Profit Method :=
(ii) Capitalisation of Super Profit Method = 1,00,000