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✦ FREE LEARNING — CLASS 11 & 12 — CBSE · PSEB — ACCOUNTS · ECONOMICS · BST ✦
From the following information, calculate the value of goodwill of the firm: (i) at three years’ purchase of Average Profit; (ii) at three years’ purchase of Super Profit; (iii) on the basis of Capitalisation of Super Profit; and (iv) on the basis of Capitalisation of Average Profit. Information: (a) Average Capital Employed is ₹6,00,000; (b) Net Profit of the firm for the last three years ended: 31st March, 2025 ₹2,00,000, 31st March, 2024 ₹1,80,000, 31st March, 2023 ₹1,60,000; (c) Normal Rate of Return in similar business is 10%; (d) Remuneration of ₹1,00,000 to partners is to be taken as a charge against profit; (e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) are ₹7,00,000, while Partners’ Capital is ₹6,00,000 and Outside Liabilities ₹1,00,000.
Average Profit = (₹2,00,000 + ₹1,80,000 + ₹1,60,000) / 3 = ₹5,40,000 / 3 = ₹1,80,000.
Adjusted Average Profit = ₹1,80,000 – ₹1,00,000 (partners’ remuneration) = ₹80,000.
Capital Employed = Total Assets – Outside Liabilities = ₹7,00,000 – ₹1,00,000 = ₹6,00,000.
Normal Profit = ₹6,00,000 × 10% = ₹60,000; Super Profit = ₹80,000 – ₹60,000 = ₹20,000.
(i) Average Profit Method: Goodwill = ₹80,000 × 3 = ₹2,40,000.
(ii) Super Profit Method: Goodwill = ₹20,000 × 3 = ₹60,000.
(iii) Capitalisation of Super Profit: Goodwill = ₹20,000 × 100 / 10 = ₹2,00,000.
(iv) Capitalisation of Average Profit: Capitalised Value = ₹80,000 × 100 / 10 = ₹8,00,000; Goodwill = ₹8,00,000 – ₹6,00,000 = ₹2,00,000.
Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
This guide covers "T.S. Grewal Class 12 Chapter 2 Q.38 - Nature and Valuation of Goodwill", focusing on key definitions, step-by-step concepts, applications, and revision guidelines relevant to Chapter 2 - Nature and Valuation of Goodwill.
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