1.

)The following were the profits of last three years

Year ending 31st March

Profits

2001

500000 (incl. abnormal gain Rs. 150000)

2002

400000 (after abnormal loss Rs. 200000)

2003

600000 (excl. Rs. 200000 insurance of

Plant and Machinery)

2.) The profits of the firm from the last five years were as follow:

Year

Profit (Rs.)

1999

20000

2000

30000

2001

40000

2002

50000

2003

60000

Calculate the value of goodwill on the basis of three years purchase of weighted average profits
using weights 1, 2, 3, 4 and 5 respectively.
3.) Calculate goodwill of a firm on the basis of three year purchase of weighted average profits of the
last four years. The profits of the last four years were: 2001 Rs. 35000, 2002 Rs. 47000, 2003 Rs.
66900 and 2004 Rs. 73810.
You are supplied with the following information:
1. On Jan 1, 2002 a major plant repair was undertaken for Rs. 10000 which was charged to
revenue. The said sum is capitalized for goodwill. Depreciation of 10% on reducing balance
method.
2. The closing stocks for the year 2002 and 2003 were overvalued by Rs. 1000 and Rs. 2000
respectively.
3. To cover management cost an annual charge of Rs. 5000 should be made for the purpose of
goodwill valuation.
4.) On 1st April 2001 an existing firm had assets of Rs. 75000 including cash of Rs. 5000. Its
creditors amounted to Rs. 5000 on that date. The firm had a reserve of Rs. 10000 while partner's
capital showed a balance of Rs. 60000. If the normal rate of return is 20% and the Goodwill of the
firm is valued at Rs. 24000 at four years purchase of super profits, find the average profits per year.

1.)Solution:
Calculation of total adjusted profits
Year ending 31st March

Profits

2004

Rs. 500000 - Rs. 150000 =

350000

2005

Rs. 400000 + Rs. 200000 =

600000

2006

Rs. 600000 - Rs. 200000 =

400000

Total

1350000

Calculation of Average Profits

Average Profits = Total Adjusted profits/No. of years = 1350000/3 = Rs. 450000
Goodwill = Average Profits x No. of years of purchase = 450000 x 4 = Rs. 1800000
2.)Solution:
Year

Profits (Rs.)

Weights

Product

1999

20000

20000

2000

30000

60000

2001

40000

120000

2002

50000

200000

2003

60000

300000

15

700000

Total

Weighted Average Profits = Total product/Total Weights = 700000/15 = 46666

Goodwill = Weighted Average Profits x No. of years of purchase
Goodwill = Rs. 46666 3 = Rs. 139998
3.) Solution:
Particulars

Profits
Less Management Cost

2001

2002

2003

2004

Rs.

Rs.

Rs.

Rs.

35000

47000

66900

73810

5000

5000

5000

5000

Add Capital Expenditure charged to

revenue
-

10000

1000

900

1000

2000

Less Depreciation not provided

810

Less over valuation of closing stock

-

Add over valuation of opening stock

Adjusted profits

30000

50000

1000

2000

60000

70000

Year

Profits (Rs.)

Weights

Product

2001

30000

30000

2002

50000

100000

2003

60000

180000

2004

70000

280000

10

590000

Total

Weighted Average Profits = Total product/Total Weights = 590000/10 = 59000

Goodwill = Weighted Average Profits x No. of years of purchase
Goodwill = Rs. 59000 3 = Rs. 177000
4.)Solution:
Capital Employed = Rs. 75000 - Rs. 5000 = Rs. 70000
Normal Profits

= 20% of Rs. 70000 = Rs. 14000

Goodwill

= Rs. 24000

Super profits

= Rs. 24000/4 = Rs. 6000

Average Profits

= Normal Profits + Super profits

= Rs. 14000 + Rs. 6000
= Rs. 20000