Question 11 Chapter 3 of +2-A
Table of Contents
11. Sumit purchased Amit’s business on 1st April 2019. Goodwill was decided to be valued at two years’ purchase of the average normal profit of the last four years. The profits for the past four years were:
| Year Ended | 31st March 2016 | 31st March 2017 | 31st March 2018 | 31st March 2019 |
| Profit/(Loss) | 80,000 | 1,45,000 | 1,60,000 | 2,00,000 |
Books of Account revealed that:
- Abnormal loss of 20,000 was debited to Profit and Loss Account for the year ended 31st March 2016.
- A fixed asset was sold in the year ended 31st March 2017 and gain profit of 25,000 was credited to Profit and Loss Account.
- In the year ended 31st March 2018 assets of the firm were not insured due to oversight. Insurance premium not paid was 15,000.
Calculate the value of goodwill.
The solution of Question 11 Chapter 3 of +2-A:
| Average Profit | = | Total Profit for past given years |
| Number of years |
| Average Profit | = | 1,00,000+1,20,000+1,45,000+2,00,000 |
| 4 |
| = | 5,65,000 | |
| 4 | ||
| = | 1,41,250 |
Number of years’ purchase = 2
| Goodwill | = | Average Profit X Number of years’ purchase |
| Goodwill | = | 1,41,250 X 2 |
| Goodwill | = | 2,82,500 |
Working Note: –
*1 Calculation of Adjusted Profit
| Adjusted profit for the year 31st March 2016: | = | Total Profit + Abnormal loss |
| = | 80,000 – 20,000 | |
| = | 70,000 |
|
| Adjusted profit for the year 31st March 2017: | = | Total Profit– Gain on Sale of Fixed Assets |
| = | 1,45,000 – 25,000 | |
| = | 1,20,000 | |
| Adjusted profit for the year ended 31st March 2018 | = | Total Profit– Insurance premium not paid |
| = | 1,60,000 – 15,000 | |
| = | 1,45,000 |
T.S. Grewal’s Double Entry Book Keeping +2 (Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms)
- Chapter No. 1 – Financial Statement of Not-For-Profit Organisations
- Chapter No. 2 – Accounting for Partnership Firms – Fundamentals
- Chapter No. 3 – Goodwill: Nature and Valuation
- Chapter No. 4 – Change in Profit-Sharing Ratio Among the Existing Partners
- Chapter No. 5 – Admission of a Partner
- Chapter No. 6 – Retirement/Death of a Partner
- Chapter No. 7 – Dissolution of a Partnership Firm
T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)
- Chapter No. 8 – Company Accounts – Accounting for Share Capital
- Chapter No. 9 – Company Accounts – Issue of Debentures
- Chapter No. 10 – Redemption of Debentures
T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)
- Chapter No. 1 – Financial Statements of a Company
- Chapter No. 2 – Financial Statement Analysis
- Chapter No. 3 – Tools of Financial Statement Analysis – Comparative Statements and Common- Size Statements
- Chapter No. 4 – Accounting Ratios
- Chapter No. 5 – Cash Flow Statement
Check out T.S. Grewal +2 Book 2020@ Official Website of Sultan Chand Publication
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