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✦ FREE LEARNING — CLASS 11 & 12 — CBSE · PSEB — ACCOUNTS · ECONOMICS · BST ✦
Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years’ purchase of the average profit of the last five years. The profits for the years ended 31st March were: 2021 ₹1,50,000; 2022 ₹3,50,000; 2023 ₹5,00,000; 2024 ₹7,10,000; 2025 (₹5,90,000). Adjustments: a car costing ₹1,00,000 was purchased and wrongly debited to Travelling Expenses Account (at the beginning of the year ended 31st March, 2024), on which depreciation is to be charged @ 25%. Interest of ₹10,000 on Non-trade Investments was credited to income for the years ended 31st March, 2024 and 2025. Calculate the value of goodwill after adjusting the above.
Calculation of Normal Profit
| Year | Adjustment | Normal Profit (₹) |
|---|---|---|
| 2021 | – | 1,50,000 |
| 2022 | – | 3,50,000 |
| 2023 | – | 5,00,000 |
| 2024 | 7,10,000 + 1,00,000 (car) – 25,000 (depreciation) – 10,000 (non-trade interest) | 7,75,000 |
| 2025 | (5,90,000) – 10,000 (non-trade interest) | (6,00,000) |
Total Normal Profit = ₹11,75,000; Average Profit = ₹11,75,000 / 5 = ₹2,35,000.
Goodwill = ₹2,35,000 × 4 = ₹9,40,000.
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.6 - 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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