Question 1:

Goodwill is to be valued at three years' purchase of four years' average profit. Profits for last four years ending on 31st March of the firm were:
2023 − ₹ 12,000; 2024 − ₹ 18,000;2025 − ₹ 16,000; 2026 − ₹ 14,000.
Calculate amount of Goodwill.

 

Answer:

Goodwill= Average profit × no. of purchases years’

Average profit = total profit of past given years/number of years

Average profit =12,000+18,000+16,000+14,000/4=15,000

Number of years’ purchase = 3

Goodwill= Average profit × no. of purchases years’

Goodwill= 15,000 × 3=45,000

Question 2:

Profits for the five years ending on 31st March, are as follows:
Year 2022 − ₹ 4,00,000; Year 2023 − ₹ 3,98,000; Year 2024 − ₹ 4,50,000; Year 2025 − ₹ 4,45,000 and Year 2026 − ₹ 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.

Answer:

Goodwill=Average Profit×Number of Years' Purchase

Average Profits = Total Profit÷Number of Years

Average Profits =4,00,000+3,98,000+4,50,000+4,45,000+5,00,000÷5

Average Profits =21,93,000÷5=₹ 4,38,600

Goodwill =4,38,600×4=₹ 17,54,400

Question 3:

Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2 : 1. They admit Parv into partnership for 1/4th share on 1st April, 2026. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years are:

Calculate the value of goodwill.

Answer:

Calculation of Average Profit for Five Years

 

Average Profit for Five Years=70,500/5=14,100

Calculation of Average Profit for Four Years

 

 Average Profit for Five Years=56,500/4=14,125

Average Profit of four years is taken to compute the value of goodwill of the firm. This is because Average Profit of four years is more than the Average Profit of five years.

Goodwill= Average profit × no. of purchases years’

Goodwill= 14,125 ×4 =56,500

 

Question 4:

Asin and Shreyas were partners sharing profits and losses in the ratio of 2:1. They admitted Shyam as a partner for 1/5th share in profits. For this purpose Goodwill of the firm was to be valued on the basis of three years' purchase of last five years' average profit. Profits for the last five years ended 31st March, were:

Calculate Goodwill of the firm after adjusting the following:

Profit of 2021-22  was calculated after charging 25,000 for abnormal loss of goods by fire.

Answer:

Goodwill= Average profit × no. of purchases years’

=Sum of normal profit × no. of purchases years’/total no. of years

=1,25,000+1,00,000+25,000+1,87,500+(62,500)+1,25,000/5×3 (purchases years’)

=3,00,000

 

Question 5:

Tarang purchased Jyoti's business with effect from 1st April, 2025. Profits shown by Jyoti's business for the last three financial years ENDED 31^st march,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.

Answer:

Normal Profit for the year 2024= (Total Profit - Abnormal Gain)= ₹1,00,000-12,500= ₹ 87,500
Normal Profit for the year 2025= (Total Profit + Abnormal Loss)= ₹ 1,25,000+25,000= ₹ 1,50,000
Normal Profit for the year 2026= (Total Profit - Indirect Expenses)= ₹ 1,12,500-12,500= ₹ 1,00,000
Average Profits= (Normal Profits for 2024)+(Normal Profits for 2025)+(Normal Profits for 2026)÷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