12th | Goodwill: Nature and Valuation | Question No. 6 To 10 | Ts Grewal Solution 2023-2024

(i) Manu will be given 2/5th share of the profit.

(ii) Goodwill of the firm will be valued at two years' purchase of three years' normal average profit of the firm.

Profits of the previous three years ended 31st March, were

2023-Profit `30,000 (after debiting loss of stock by fire `40,000).

2022-Loss `80,000 (includes voluntary retirement compensation paid `1,10,000).

2021-Profit `1,10,000 (including a gain (profit) of 30,000 on the sale of fixed assets).

Calculate the value of goodwill.

 

Answer;

 

Goodwill= Average profit × no. of purchases years’

=Sum of three years Profit × no. of purchases years’/Total no. of years

=(first years profit+normal loss)+(Second years loss+Retirement compensation)+(Third years’ profit – gain on sale of fixed assets)×2year/3year

=(30,000+40,000)+(-80,000+1,10,000)+1,10,000-30,000)×2/3

=1,20,000

Tarang purchased Jyoti's business with effect from 1st April, 2023. Profits shown by Jyoti's business for the last three  financial years were:

2021	:	` 1,00,000 (including an abnormal gain of  ` 12,500).
2022	:	` 1,25,000 (after charging an abnormal loss of  ` 25,000).
2023	:	` 1,12,500 (excluding  ` 12,500 as insurance premium on firm's property- now to be insured).

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

Answer:

Normal Profit for the year 2021= (Total Profit - Abnormal Gain)=  `1,00,000-12,500=  ` 87,500
Normal Profit for the year 2022= (Total Profit + Abnormal Loss)=  ` 1,25,000+25,000=  ` 1,50,000
Normal Profit for the year 2023= (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:

Year	2019	2020	2021	2022	2023
Profit/(Loss) ( `)	1,50,000	3,50,000	5,00,000	7,10,000	(5,90,000)

On 1st April, 2022, 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, 2022 and 2023.
Calculate the value of goodwill after adjusting the above.

Answer:

Normal Profits for the year ended 31st March, 2022:=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, 2023:=(Total Loss + Income from Non-Trade Investments)= `(5,90,000 + 10,000)= `6,00,000
Average Profits=Normal Profits from 31st March, 2019 to 31st March,2023/5
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

Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3 : 2. They admit Kanika into partnership for 1/4th share in profit. Kanika brings in her share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2021 - Profit  ` 50,000 (including profit on sale of assets  ` 5,000).
2022 - Loss  ` 20,000 (including loss by fire  ` 30,000).
2023 - Profit  ` 70,000 (including insurance claim received  ` 18,000 and interest on investments and Dividend received  ` 8,000).
Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.

Answer:

Normal Profits for the year ended 31st March, 2021=(Total Profits-Profit on Sale of Assets)= `(50,000-5,000)= `45,000
Normal Profits for the year ended 31st March, 2022=(Loss by fire - Total Loss)= `(20,000-30,000)=  `10,000
Normal Profit for the year ended 31st March, 2023=(Total Profit - Insurnace Claim Received-Interest on Invetsment -Dividend Received)                                                                          

= `(70,000-18,000-8,000)= `44,000
Average Profits= `Normal Profits from the year ended 31st March,2021 to 31st March, 2023= `45,000+10,000+44,000/3= `33,000
Goodwill=Average Profits for the last three years × No. of years of Purchase= `(33,000×2)= `66,000
Kanika's Share of Goodwill= `66,000×1/4= `16,500

 

Sumit purchased Amit's business on 1st April, 2023. 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:

Year Ended	31st March, 2020	31st March, 2021	31st March, 2022	31st March, 2023
Profits ( `)	80,000	1,45,000	1,60,000	2,00,000

Books of Account revealed that:
(i) Abnormal loss of  ` 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2020.
(ii) A fixed asset was sold in the year ended 31st March, 2021 and gain (profit) of  ` 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2022 assets of the firm were not insured due to oversight. Insurance premium not paid was  ` 15,000.
Calculate the value of goodwill.

Answer:

Goodwill=Average Profit×No. of years' purchase               

Goodwill =1,41,250×2= ` 2,82,500

Working Notes:

WN: 1 Calculation of Normal Profits

Year	Profit/(Loss) ( `)	Adjustment	Normal Profit ( `)
31 March, 2020	80,000	20,000	1,00,000
31 March, 2021	1,45,000	(25,000)	1,20,000
31 March, 2022	1,60,000	(15,000)	1,45,000
31 March, 2023	2,00,000	-	2,00,000
			5,65,000

 

WN: 2 Calculation of Average Profit

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