T.S. Grewal Class 12 Chapter 2 Q.16 - Nature and Valuation of Goodwill

Question 16

Amit and Kartik are partners sharing profits and losses equally. They decided to admit Saurabh for a share in the profits. For this purpose, the goodwill of the firm was to be valued at four years’ purchase of super profits. The Balance Sheet of the firm on Saurabh’s admission showed Capital A/cs: Amit ₹90,000 and Kartik ₹50,000 (total ₹1,40,000); General Reserve ₹20,000; Creditors ₹5,000; Bills Payable ₹25,000; with assets – Fixed Assets (Tangible) ₹75,000, Furniture ₹15,000, Stock ₹30,000, Debtors ₹20,000 and Cash ₹50,000 (total ₹1,90,000). The normal rate of return is 12% p.a. The average profit of the firm for the last four years was ₹30,000. Calculate the goodwill of the firm. (CBSE Sample Paper 2025)

Solution

Capital Employed = Capital + General Reserve = ₹1,40,000 + ₹20,000 = ₹1,60,000 (also = Total Assets ₹1,90,000 – Creditors ₹5,000 – Bills Payable ₹25,000).

Normal Profit = ₹1,60,000 × 12% = ₹19,200.
Super Profit = Average Profit – Normal Profit = ₹30,000 – ₹19,200 = ₹10,800.

Goodwill of the firm = ₹10,800 × 4 = ₹43,200 (Saurabh’s share of goodwill = ₹43,200 × his share of profit).