Solution

GOODWILL

Class 12 - Accountancy
Section A
1.
(b) Net assets
Explanation:
it is also called capital employed

2.
(d) 76,000
Explanation:
year 2018-19 2019-20 2020-21
profit 70,000 60,000 80,000
(+) Abnormal loss 15,000
(+) loss on sale of furniture 3,000
adjusted profit 70,000 75,000 83,000
adjusted average profit = 70,000 + 75,000 + 83,000 = 2,28,000 /3 = 76,000

3. (a) 5,00,000
e
Explanation:
pir
capitalised value of business = average profit / normal rate of return
3,00,000/ 15% = 20,00,000
actual capital employed = assets (-) outsider liabilities
As

17,00,000 (-) 2,00,000 = 15,00,000

goodwill = capitalised value of business (-) capital employed
20,00,000 (-) 15,00,000 = 5,00,000
4.
(b) 70,000
Explanation:
year 2018-19 2019-20 2020-21
profit 40,000 40,000 20,000
(+) abnormal loss 10,000
(-) abnormal gain (5,000)
adjusted profit 40,000 50,000 15,000
average profit = 40,000 +50,000+ 15,000 = 1,05,000 /3 = 35,000
goodwill = 35,000 x 2 = 70,000

5.
(c) ₹ 70,000
Explanation:
1,20,000
Super Profit = 4
= ₹ 30,000
Capital Employed × Normal Rate of Return
Normal Profit = 100

Capital Employed = Assets - Liabilities

= ₹ 5,00,000 - ₹ 1,00,000 = ₹ 4,00,000
Normal Profit = 4,00,000 × = ₹ 40,000
10

100

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 Average Profit = Super Profit + Normal Profit
= ₹ 30,000 + ₹ 40,000 = ₹ 70,000

6.
(d) Internally generated
Explanation:
As per the Accounting Standard-26 issued by ICAI regarding intangible assets, goodwill should be recorded in the books of
accounts only when some money or money’s worth is paid for it. Internally generated goodwill should not be recorded in the
books because nothing is paid for It.

Section B
7. Goodwill = No. of years’ purchase × Super Profits
₹ 1, 00,000 = 4 × Super Profits
Super Profits = ₹ 25,000
Capital Employed = Total Assets - Outside Liabilities
= ₹ 5,00,000 - Nil = ₹ 50,000
Normal Profit = 10% of ₹ 5,00,000 = ₹ 50,000
Super Profit = Average Profit - Normal Profit
₹ 25,000 = Average profit - ₹ 50,000
Average Profit = ₹ 75,000
8. The amount of goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets
that can be identified, and the liabilities obtained in the purchase.
Product
Annual Profits Weights
Year
e (Profit × Weight)
(Rs) (Rs)
(Rs)
pir
1 18,000 1 18,000

2 24,000 2 48,000
As

3 36,000 3 1,08,000

Total 6 1,74,000
Weighted average profit of last three years = Rs 1,74,000/6 = Rs 29,000
Value of Goodwill at two years purchase of weighted average profits = Rs 29,000 × 2 = Rs 58,000.
9. CALCULATION OF NORMAL PROFIT
Year Ended Profit/(Loss)(₹) Adjustments*(₹) Normal Profit (₹)

31st March 2020 70,000 (10,000) 60,000

31st March 2021 1,00,000 20,000 1,20,000

31st March 2022 (55,000) (45,000) (1,00,000)

31st March 2023 1,44,000 6,000 1,50,000

2,30,000
T otal N ormal P rof it ₹ 2,30,000
Average Profit = = 4
= ₹ 57,500
N umber of Y ears

Value of Goodwill = Average Porfit × Number of Years' Purchase

= ₹ 57,500 × 2 = ₹ 1,15,000.
*Adjustments:

i. ₹

Repair expenses that should have been debited to Profit & Loss Account as expense but accounted as capital
(50,000)
expenditure. Loss to increase by ₹ 50,000

5,000

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 Depreciation wrongly debited to Profit & Loss Account for the Year ended 31st March, 2022 (₹ 50,000 × 12

100
×

10
)
ii. 12

Adjustment to be made in profit for the year ended 31st March 2022 (45,000)

st 6,000
iii. Adjustment to be made for depreciation for the year ended 31 March 2023 (12% of ₹ 50,000)
10. Under this method, goodwill is calculated by taking average super profit as the value of an annuity over a certain number of years.
The present value of this annuity is computed by discounting at the given rate of interest (normal rate of return). This discounted
present value of the annuity is the value ofgoodwill.
Calculation of Goodwill
Total Capitalised value of the firm
Actual Profit
= × 100
Rate of Normal Profits
30,000
= 10
× 100 = Rs 3,00,000
Net Tangible Assets of the firm = Total Tangible Assets - Outsider’s Liabilities’
= Rs 2,50,000 - Rs 40,000
= Rs 2, 10,000
Goodwill = Total Capitalised Value - Net Assets
= Rs 3,00,000 - Rs 2,10,000
= Rs 90,000

e
pir
As

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