ANGAD ACADEMY

CHAPTER :- 2
Goodwill - Nature & Valuation WS 5

Section A

1 A business earned average profits of₹ 6,00,000 during the last few years. The [1]
normal rate of profits in the similar type of business is 10%. The total value of
assets and liabilities of the business were ₹ 22,00,000 and ₹ 5,60,000
respectively. Calculate the value of goodwill of the firm by super profit method if
the goodwill is valued at 2.5 years purchase of super profits. Goodwill of the firm
will be:

a) 10,70,000

b) 10,60,000

c) 10,90,000

d) 10,80,000

2 The Goodwill of the firm is not affected by the: [1]

a) Better Customer service

b) Location of the firm

c) Abnormal Gain (non recurring)

d) After Sale Services

3 When does the need for valuation of internally generated goodwill arise? [1]
4 How the goodwill is valued under the super profits method? [1]
5 Atul and Deepak are partners in a firm dealing in stationery items. The firm is [1]
well managed and enjoys the advantage of being cost - effective. It buys
stationery items at a reasonable cost from Deepak’s relative who is a
manufacturer of stationery items. The firm’s sale outlet is situated near a school.
As a result, the firm has a steady demand for stationery items and is earning good
profits. The firm is donating 10% of its profits to the nearby school for the
education of the students below the poverty line. State any two factors affecting
the value of goodwill of the firm.
6 How the goodwill is valued under the average profits method? [1]
7 Calculate value of goodwill on the basis of three years’ purchase of average profit [1]
of the preceding five years which were as follows:

8 Give two main steps involved in valuing the Goodwill by according to Super Profit [1]
Method.
9 Assets worth Rs10,00,000 & liabilities Rs4,00,000. Annual profit is Rs60,000. [1]
Normal profit being 10%. State the goodwill by the capitalisation of super profit
method.
1 What is meant by Normal Profit? [1]
0
1 If super profits are Rs1500 and rate of return is 15%. State the goodwill on the [1]
1 basis of capitalising the super profits.
1 State any two factors affecting the value of Goodwill of a firm. [1]
2
1 LMN, a Partnership Firm’s Capital is₹ 3,00,000. The normal rate of return on a [1]
3 firm’s capital is 12%. During the year 2018, the firm earned a profit of ₹ 48,000.
Calculate goodwill on the basis of 5 years purchase of super profit method?
1 State any two circumstances when there is need to revalue the goodwill. [1]
4
1 What is non - purchased goodwill? [1]
5
1 How does the nature of business affect the value of goodwill of a firm? [1]
6
1 Pankaj and Tushar are in restaurant business having credit balance in their fixed [1]
7 Capital Accounts as₹ 2,50,000 each. They have credit balances in their Current
Accounts of ₹ 30,000 and ₹ 20,000 respectively. The firm does not have any
liability. They are regularly earning profits and their average profit of last 5 years
is ₹ 1,00,000. If the normal rate of return is 10%, find the value of goodwill by
Capitalisation of Average Profit Method.
1 The books of business showed that the firm’s capital employed on December 31, [1]
8 2015, is₹ 5,00,000 and the profits for the last five years were: 2010 - ₹
40,000;2012 - ₹ 50,000; 2013 - ₹ 55,000; 2014 - ₹ 70,000 and 2015 - ₹
85,000. You are required to find out the value of goodwill based on 3 years
purchase of the super - profits of the business, given that the normal rate of
return is 10%.
1 Give any two features of Goodwill. [1]
9
2 How does the factor location affect the goodwill of a firm? [1]
0
2 Distinguish between average profits and super - profits. [1]
1
2 In a firm the goodwill was to be calculated by average profit method. The profits [1]
2 of the last 5 years were (i) Rs 10,000 (ii) Rs 12000 (iii) Rs 16000 (iv) Rs 15000
(v) Rs 17000. State the goodwill if it is calculated on the basis of 3 years purchase
of last 5 years’ profits.
2 What are Super Profits ? [1]
3
2 What do you understand by Normal Profits? [1]
4
2 How does location affect the Goodwill of a business? [1]
5
2 Goodwill of the firm is valued at₹ 5,00,000 at 2 years’ purchase of average profit. [1]
6
Determine the missing values:

Total Normal Profit = ₹ 2,50,000 + ₹ ________ + ₹ 3,00,000 - ₹ 1,00,000 + ₹

3,50,000 = ₹ ________

Average Profit
$=\frac{\mathrm{Total}\mathrm{Normal}\operatorname{Profit}}{\mathrm{Nu
mber}\mathrm{of}\operatorname{Years}}=\frac{$ = ₹ ________

Goodwill - ₹ ________ × 2 = ₹ 5,00,000.

2 What is the need for the valuation of Goodwill in case of partnership ? [1]
7
2 The profit for the five years of a partnershipfirm are as follows: [1]
8
Year 2013 = ₹ 4,00,000

Year 2014 = ₹ 3,98,000

Year 2015 = ₹ 4,50,000

Year 2016 = ₹ 4,45,000

and year 2017 = ₹ 5,00,000

Calculate goodwill of the firm on the basis of 4 years purchase of 5 yearsaverage

profits.

2 What is meant by Self - generated Goodwill? [1]

9
3 Give the formula of calculation of goodwill by Capitalisation of super profits [1]
0 method.
3 State any three circumstances other than (i) admission of a new partner (ii) [1]
1 retirementof a partner and (iii) deathof a partner, when need for valuation of
goodwill of a firm may arise.
3 The capital of the firm of A and B is₹ 1,00,000 and reserves are ₹ 20,000and the [1]
2 market rate of interest is 10%. The annual salary to partners is ₹ 6,000 each. The
profits for the last 3 years were ₹ 30,000; ₹ 36,000 and ₹ 42,000. Goodwill is to be
valued at 2 years purchase of the last 3 years’ average super - profits. Calculate
the goodwill of the firm.
3 Rakesh and Ashok earned a profit of₹ 5,000. They employed capital of ₹ 25,000 in [1]
3 the firm. It is expected that the normal rate of return is 15% of the capital.
Calculate amount of goodwill if goodwill is valued at three years’ purchase of
super profit.
3 How the goodwill is valued underthe Capitalisation of Super Profit method? [1]
4
3 Sajan and Sanjay are partners in a firm. Their capitals were Sajan Rs. 4,00,000; [1]
5 SanjayRs. 1,00,000. During the year 2018, the firm earned a profit of Rs. 1,50,000.
Calculate the value of goodwill of the firm by capitalisation method assuming that
the normal rate of return is 10%?
3 How goodwill is valued under the average profits method? [1]
6
3 Why is it necessary to adjust goodwill at the time of change in profit sharing [1]
7 ratio?
3 Define Goodwill. [1]
8
3 If in question both existing goodwill, as well as goodwill brought by a new [1]
9 partner, is given then how existing goodwill is shown in books?
4 How does the market situation affect the value of goodwill of a firm? [1]
0
4 How does the factor ‘efficiency of management’ affect the goodwill of a firm? [1]
1
4 A Partnership firmhas earned average profits of Rs. 1,20,000 during the last few [1]
2 years and the normal rate of return in a similar business is 15%. Ascertain the
value of goodwill by the capitalization of the average profits method, given that
the value of net assets of the business is Rs.7,20,000.
4 Explain any four factors affecting the Goodwill. [1]
3
4 A business has earned average profit of₹ 1,00,000 during the last few years. Find [1]
4 out the value of goodwill by capitalisation method, given that the assets of the
business are ₹ 10,00,000 and its external liabilities are ₹ 1,80,000. The normal
rate of return is 10%.
4 What is meant by Purchased Goodwill? [1]
5
4 What is meant by Average Profit? [1]
6
4 What is meant by Capitalisation of Average Profit? [1]
7
4 The profit for the five years ending on 31 𝑠𝑡 March, are as follows: [1]
8
Year 2019 - ₹ 4,00,000; Year 2020 - ₹ 3,98,000; Year 2021 - ₹ 4,50,000; Year
2022 - ₹ 4,45,000; Year 2023 - ₹ 5,00,000.

Calculate goodwill of the firm on the basis of 4 years’ purchase of 5 years’ average
profit.

4 How does the factor Efficiency of Management affect the goodwill of a firm? [1]
9
5 How does goodwill arise? [1]
0
5 What do you understand by Capitalisation of profit? [1]
1
5 What is Hidden Goodwill? [1]
2
5 How goodwill is valued under the Capitalisation of Average Profit method? [1]
3
5 Define purchased Goodwill and Self Generated Goodwill. [1]
4
5 How does the factor of Location affect the goodwill of a firm? [1]
5
5 From the figures given, calculate goodwill according to the Capitalisation of Super [1]
6

Profit Method.
5 What is meant by number of years’ purchase at the time of valuation of goodwill? [1]
7
5 Why ‘Goodwill’ considered an ‘Intangible Asset’ but not a ‘Fictitious Asset’? [1]
8
5 Distinguish Between Average Profit Method and Super Profit Method. [1]
9
6 Enumerate two main steps involved in valuing the goodwill according to the [1]
0 super profit method.
6 From the figures given below, calculate goodwill according to the capitalisation of [1]
1

Average Profits Method:

6 Name any four factors which affect the Goodwill of a partnership firm. [1]
2
6 If the amount of super profit is negative, what does it indicate? [1]
3
6 From the following information, calculate value of goodwill of the firm by [1]
4 applying Capitalisation Method:

Total Capital of the firm ₹ 16,00,000.

Normal rate of return 10%.

Profit for the year ₹ 2,00,000.

6 How do we record goodwill in the books of Accounts as per the Accounting [1]
5 Standards?
6 Give the formula of goodwill by Capitalisation of Average Profits? [1]
6
6 The goodwill of a firm was to be valued at two years’ purchase of the average [1]
7 profit of the last three years. The profits were as under:

Calculate the amount of goodwill.

6 (Capitalisation Method): A earns Rs. 1,20,000 as its annual profits, the rates of [1]
8 normal profit being 10%. The assets of the firm amounted to Rs. 14,40,000 and
liabilities to Rs. 4,80,000. Find out the value of goodwill by capitalization method.
6 The profits of firm for thefive years are as follows: [1]
9
 Calculate the value of goodwill on the basis of three years’ purchase of weighted
average profits based on weights 1, 2, 3, 4 and 5 respectively.

7 How does the factor quality of the productaffect the goodwill of a firm? [1]
0
7 What is meant by Capitalisation of Super Profit? [1]
1
7 A firm earned net profits during the last three years as: [1]
2

The capital investment of the firm is₹ 60,000. The normal return on the capital is
10%. Calculate the value of goodwill on the basis of three years’ purchase of the
average super profit for the last three years.

7 How does the market situation affect the value of goodwill of a firm? [1]
3
7 How does the factor ‘quality of product’ affect the goodwill of a firm? [1]
4
7 How goodwill is valued under the Capitalisation of Super Profit method? [1]
5