ACCOUNTANCY CHAPTER 2

GOODWILL
MOST IMPORTANT QUESTIONS
Q1
A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1. They decide to take D into
partnership for 1/4th share on 1st April, 2020. For this purpose, goodwill is to be valued at 3 times the average
annual profits of the previous four or five years whichever is higher. The agreed profits for goodwill purpose of the
past five years are as follows:
Year ending on 31 March 2016 1,30,000
Year ending on 31 March 2017 1,20,000
Year ending on 31st March 2018 1,50,000
Year ending on 31st March 2019 1,10,000
Year ending on 31 March 2020 2,00,000
Calculate value of Goodwill.

Q2

Q3
On 1st April, 2021, an existing firm had assets of Rs. 75,000 including cash of Rs. 5,000. Its creditors amounted to
Rs. 5,000 on that date. The firm had a Reserve of Rs. 10,000 while Partners' Capital Accounts showed a balance of
Rs. 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at Rs. 24,000 at four years purchase
of super profit, find average profit per year of the existing firm.

Q4
Yash and Karan were partners in an interior designer firm. Their fixed capitals were 6,00,000 and 4,00,000
respectively. There were credit balances in their current accounts of 4,00,000 and 5,00,000 respectively. The firm
had a balance of 1,00,000 in General Reserve. The firm did not have any liability. They admitted Radhika into
partnership for 1/4th share in the profits of the firm. The average profits of the firm for the last five years were
5,00,000. Calculate the value of goodwill of the firm by capitalization of average profits method. The normal rate of
return in the business is 10%.

Q5
Geet and Meet are partners in a firm. They admit Jeet into partnership for equal share. It was agreed that goodwill
will be valued at three years' purchase of average profit of last five years. Profits for the last five years were:
 Year Ended Profits (Rs.)

31 March, 2016 90,000 (Loss)

31 March, 2017 1,60,000
31 March, 2018 1,50,000
31 March, 2019 65,000
31 March, 2020 1,77,000

Books of Account of the firm revealed that:-

(i) The firm had gain (profit) of Rs. 10,000 from sale of machinery sold in the year ended 31st March, 2017. The gain
(profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of Rs.20,000 incurred in the year ended 31st March, 2018 because of a machine
becoming obsolete in accident.
(iii) Overhauling cost of second-hand machinery purchased on 1st July, 2018 amounting to Rs. 1,00,000 was
debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method. Calculate the
value of goodwill.

Q6
A, B and C are partners sharing profits and losses equally. They agree to admit D for equal share. For this purpose,
goodwill is to be valued at 3 year's purchase of average profits of last 5 years which were as follows.
Year ending on 31 March 2007 60,000 (Profit)
Year ending on 31 March 2008 1,50,000 (Profit)
Year ending on 31 March 2009 20,000 (loss)
Year ending on 31 March 2010 2,00,000 (Profit)
Year ending on 31 March 2011 1,85,000 (Profit)
On 1st October, 2010 a computer costing Rs. 40,000 was purchased and debited to office expenses account on
which depreciation is to be charged @25% p.a. Calculate the value of Goodwill.

Q7
Following information is available about the business of a firm
(i) Profits: In 2013, Rs. 40,000; In 2014, Rs. 50,000; In 2015, Rs. 60,000,
(ii) Non-recurring income of Rs.4,000 is included in the profits of 2014,
(iii) Profits of 2013 have been reduced by Rs. 6,000 because goods were destroyed by fire,
(iv) Goods have not been insured but it is thought to insure them in future. The insurance premium is estimated at
Rs.400 per year,
(v) Reasonable remuneration of the proprietor of business is Rs.6,000 per year, but it has not been taken into
account for calculation of above-mentioned profits,
(vi) Profits of 2015 include Rs.5,000 income on investment.
Goodwill is agreed to be valued at two years' purchase of the weighted average profits of the past three years.
The appropriate weights to be used are: 2013: 1 ; 2014: 2 ; 2015: 3.

Q8
Calculate the value of goodwill as on 1st April, 2015, on the basis of 2.5 year's purchase of the average profits of
the last five years. The profits and losses for the years were: 2010 Rs. 80,000; 2011 Rs.1,00,000; 2012 Loss
Rs.30,000; 2013 Rs.1,70,000; 2014 Rs.1,60,000 and 2015 Rs. 1,80,000. You are informed that the profits of the year
2014 included profit on sale of a fixed asset amounting to Rs. 50,000 and the profits for the year 2015 were
affected by a loss due to fire amounting to Rs.20,000.
Q9
Calculate goodwill of a firm on the basis of three years' purchase of the Weighted Average Profit of the last four
years. The profits of the last four financial years ended 31st March, were: 2017 - Rs. 25,000, 2018 - Rs. 27,000,
2019 - Rs. 46,900 and 2020 Rs. 53,810. The weights assigned to each year are: 2017 - 1, 2018 - 2; 2019 - 3: 2020 - 4.
You are supplied the following information:
(i) On 1st April, 2017, a major plant repair was undertaken for Rs. 10,000 which was charged to revenue. The said
sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on Written Down
Value Method.
(ii)The Closing Stock for the years ended 31st March, 2018 and 2019 were overvalued by Rs. 1,000 and Rs. 2,000
respectively.
(iii) To cover management cost an annual charge of Rs. 5,000 should be made for the purpose of goodwill
Valuation.

Q10
On April 1st 2015, an existing firm had assets of Rs.5,00,000 including cash of Rs. 20,000. The firm had a Reserve
Fund of Rs. 90,000, partner's capital accounts showed a balance of Rs. 3,80,000 and creditors amounted to
Rs.30,000. If the normal rate of return is 20% and the goodwill of the firm is valued at Rs.64,000 at 4 year's
purchase of super profit, find the average profits of the firm.

Q11
A firm earns a profit of Rs. 37,000 per year. In the same business a 10% return is generally expected. The total
assets of the firm are Rs. 4,00,000. The value of other liabilities is Rs. 90,000. Find out the value of goodwill.

Q12
Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st April, 2021. They agreed to
value goodwill at 3 years' purchase of Super Profit Method for which they decided to average profit of last 5 years.
The profits for the last 5 years were:
Year Ended Net Profit (Rs.)
31st March, 2017 1,50,000
31st March, 2018 1,80,000
31st March, 2019 1,00,000 (Including abnormal loss of Rs.1,00,000)
31st March, 2020 2,60,000 (Including abnormal gain (profit) of Rs. 40,000)
31st March, 2021 2,40,000
The firm has total assets of Rs. 20,00,000 and Outside Liabilities of Rs 5,00,000 as on that date. Normal Rate of
Return in similar business is 10%. Calculate value of goodwill.

Q13
The following information relates to a firm of Yuvraj, Maharaj and Raghuraj:
(a) Profits for the last four years:
2012 2,50,000 (Profit)
2013 2,70,000 (Profit)
2014 1,80,000 (Loss)
2015 5,24,000 (Profit)
(b) Remuneration to each partner Rs.1,000 p.m. (to be treated as a charge on profits)
(c) Average Capital employed in the business is Rs.8,00,000.
(d) Normal Rate of Return 15%.
(e) Assets (excluding goodwill) Rs.8,75,000 Liabilities Rs. 32,000.
You are required to calculate the value of goodwill:
(i) At 2 year's purchase of Average Profits.
(ii) At 3 year's purchase of Super Profits.
(iii) On the basis of Capitalisation of Super Profits.
(iv) On the basis of Capitalisation of Average Profits.

ANSWER KEY
Q1 Goodwill = 4,35,000

Q2 Capital employed = 2,50,000

Q3 Average profit = 20,000

Q4 Goodwill = 30,00,000

Q5 Goodwill = 3,00,000

Q6 Goodwill = 3,66,000

Q7 Goodwill = 88,200

Q8 Goodwill = 2,75,000

Q9 Goodwill = 1,20,000

Q10 Average profit = 1,10,000

Q11 Goodwill = 60,000

Q12 Goodwill = 1,44,000

Q13 (i) Goodwill = 3,60,000

(ii) Goodwill = 1,80,000
(iii) Goodwill = 4,00,000
(iv) Goodwill = 3,57,000