12th | Goodwill – Nature And Valuation | Question No. 6 To 10 | Ts Grewal Solution 2024-2025

Tarang purchased Jyoti's business with effect from 1st April, 2022. Profits shown by Jyoti's business for the last three  financial years were:

Calculate the value of firm's goodwill on the basis of two year's purchase of the average profit of the last three years.

Normal Profit for the year 2022= (Total Profit - Abnormal Gain)=  `1,00,000-12,500=  ` 87,500
Normal Profit for the year 2023= (Total Profit + Abnormal Loss)=  ` 1,25,000+25,000=  ` 1,50,000
Normal Profit for the year 2024= (Total Profit - Indirect Expenses)=  ` 1,12,500-12,500=  ` 1,00,000
Average Profits= (Normal Profits for 2020)+(Normal Profits for 2021)+(Normal Profits for 2022)÷3
Average Profits=87,500+1,50,000+1,00,000/3=  ` 1,12,500
Goodwill=Average Profits of last three years × No. of years of PurchaseGoodwill=  ` 1,12,500×2=  ` 2,25,000

Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years' purchase of average profit of last five years. These profits for the year ended 31st March, were:

On 1st April, 2021, a car costing  ` 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. Interest of  ` 10,000 on Non-trade Investments is credit to income for the year ended 31st March, 2021 and 2022.
Calculate the value of goodwill after adjusting the above.

Normal Profits for the year ended 31st March, 2021:=Total Profits+Purchase of car wrongly debited - Depreciation on Car - Income from Non-trade Investments= `(7,10,000 + 1,00,000 - 25,000 - 10,000)=  ` 7,75,000
Normal Profits for the year ended 31st March, 2022:=(Total Loss + Income from Non-Trade Investments)= `(5,90,000 + 10,000)= `6,00,000
Average Profits=Normal Profits from 31st March, 2018 to 31st March,2022/5
Average Profits=  ` 1,50,000+3,50,000+5,00,000+7,75,000+(6,00,000)/5= `2,35,000
Goodwill=Average Profits for last 5 years×No. of years of purchase= `(2,35,000×4)= `9,40,000

Sumit purchased Amit's business on 1st April, 2024. Goodwill was decided to be valued at two years' purchase of average normal profit of last four years. The profits for the past four years were:

Books of Account revealed that:
(i) Abnormal loss of  ` 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2021.
(ii) A fixed asset was sold in the year ended 31st March, 2022 and gain (profit) of  ` 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2023 assets of the firm were not insured due to oversight. Insurance premium not paid was  ` 15,000.
Calculate the value of goodwill.

Goodwill=Average Profit×No. of years' purchase               

Goodwill =1,41,250×2= ` 2,82,500

Working Notes:

WN: 1 Calculation of Normal Profits

WN: 2 Calculation of Average Profit

Average Profit=Total Profit for past given years Number of Years =5,65,000/4= ` 1,41,250

Profits of a firm for the year ended 31st March for the last five years were:

Calculate value of goodwill on the basis of three years' purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2020, 2021, 2022, 2023 and 2024.

Weighted Average profit = total profit of past given years/Total of Weighted

 Weighed Average profit =3,48,000/15=23,200

Number of years’ purchase = 3

Goodwill= Weighted Average profit × no. of purchases years’

Goodwill=  23,200×3 =69,600

Raman and Daman are partners sharing profits in the ratio of 60 : 40 and for the last four years they have been getting annual salaries of  ` 50,000 and  ` 40,000 respectively. The annual accounts have shown the following net profit before charging partners' salaries:
Year ended 31st March, 2022 −  ` 1,40,000; 2023 −  ` 1,01,000 and 2024 −  ` 1,30,000.
 On 1st April, 2024, Zeenu is admitted to the partnership for 1/4th share in profit (without any salary). Goodwill is to be valued at four years' purchase of weighted average profit of last three years (after partners' salaries); Profits to be weighted as 1 : 2 : 3, the greatest weight being given to the last year. Calculate the value of Goodwill.

Weighted Average Profits=Total of Weighted Profits/Total Weights= `1,92,000/6= `32,000

Goodwill=Weighted Average Profits × No. of years of Purchase    = `(32,000×4)=  `1,28,000