- ... ,~ tntry Book .

Le l<eeprng-CBSE XII
t Us tak Ma hag un Business f
consid . e an example. AB Business House acquires or
eration Of t 10,00,000. Assets acquired were valued at f 20,00,000 and 1. cl h,.~
take l~b·11·
n ove r Were of t 12 00 000 t 2 00 000 paid in excess of net assets, i.e., ~\ 8o1~..,
3=
( " 2 0 oo 00 ' ' . ' ' ' O,~
' ' O- t dwill, which is pur cha sed goodwill.
12,00,000) is towards goo
·11 b . ·
AS- 26, Int angi·b le Asse ts prescri/Jes that purchased goodwi may e recognised 1n the boo~
. ,I.,[ /if. OJ
account an d writ. ten off at the earliest but within the estimated use1.. 1;e.

Features of Purchased Goodwill:

iness.
(i) It nor mal ly arises on the purchase of a bus
be recognised in the books of acCOl.J,hl
(ii) Since the consideration is paid for it, it may
t. ·• ·
(iii) It is sho wn in the Balance Sheet as an asse
ent but it is ascertained when both pu rcha5e
(iv) Value of Goodwill is a subjective assessm
r
and seller agree to its valuation.
r than its esti mat ed useful life.
(v) It is amortised at the earliest but not late
cha ser' s expectation of future profits.
(vi) Value of goodwill dep end s upo n the pur

Illustration 1 (Purchas ed Goodwill).

~
of Shri Shivam for a pur cha se consideration
Am rit Daily Needs acquired the business
ilities take n ove r are:
t 5,00,000 pai d by cheque. The assets acquired and liab
t Liabilities: ~
Assets:
10,000 Creditors 5,20,000
Fur nitu re
7,50,000 Salaries Payable 75,000
Inventory 15,00)
1,50,000 Out stan din g Expenses
Debtors
Pass the necessary Journal entries.
Amrit Daily Needs
Sol utio n:
JOURNAL
L.F. Dr.m Cr.(f)
Date Particulars
... Dr. 10,000
Furniture Ne
...Dr. 7,50,000
Inventory Ne
... Dr. 1,50,000
Debtors Ne
...Dr. 2,00,000
Goodwill Ne (Balancing Figu re) 5,20,001
To Cred itors Ne 75,001
To Salar ies Payable Ale 15,o&l
To Outstanding Expe nses Ale 5,00,000
To Shiva m
off 5 00 000
(Bus iness of Shiva m acquired for a net consideration
' ' '
f 2,00, 000 being towa rds goodwill)
Shivam .. .Dr. 5,00, 000
5,00,rf/J :
To BankA/c I
(Cheque issued to Shivam) -~ l-/
I
 .. . --
strl' . f GL)lldwill is calculated by applyin the f .
1 l)
11l' g 0 110 wing formula·
, ,., 0 dwill = Average Profit (as per Ste ·
Go 2
.
, ,le, goodwill _ . . P ) >< Number of Years' Purchase (as per Step 3).
ot a firm 1s to be valued , ,
fl l''''"
1 r f d
firm earne profits . m. the pre · th
atf ree years purchase of four years average
rC'l,fit. 'fhe .
Goodwill will. vious our years' as ~ 15,000; ~ 11,000; ~ 18,000 and
be valued as follows:
t \b,000-
. _ r 1s,ooo + ~ 11,000 + ~ 18,000 + 't
Average Profit - 4 16' 000 = 't 15,000

Goodwill= Average Profit >< Number of Years' Purchase

= r 15,QQQ X 3 = ~ 45,QQQ.

n1ustra f1on 2 (Average Profit Method when Past Adjustments are Made) .
. d Krishan were partners sharing profits and losses in the ratio of 2: 1. They admitted
Bart an . . . .
as a partner for 1/Sth share m the profits. For this purpose, the Goodwill of the firm
Shyatn . , .
,\•as to be valued on. the basis of three years purchase of last five years' average profits. The
pro fits for the last five years were:
Year
I 2013-14 2014-15
- I 2015- 16 2016- 17 2017-18

---- Profit m 50,000 40,000 75,000 (25,000)

l
-
50,000
-

calculate Goodwill of the firm after adjusting th e following: .

rofit of 2014-15 was calculated after charging~ 10,000 for abnormal loss of goods by fire.
TheP (CBSE 2019 C)
Solution:
CALCULATION OF NORMAL PROFIT

Year Adjustment ({) \ Normal Profit ('{)

---------- I
2013-1 4 50,000
2014-1 5 40,000 + 10,000 (Abnormal Loss)
II 50,000
2015-16 75,000
2016-17 {25,000)
2017-18 50,000
---
Total Normal Profit 2,00,000
r -
 l .8 Doub le Entry Book Keeplng-CBSE XII
. fits and losses in the ratio of 3
JUustrati 3 . fi shartng pro /4th h . :i .
on . April, 2021 for 1 s are lI1 the · l.°h
Sara, Tara and Zara are partners mahi rmfrom 1st verage ann ua pro t O the pr . '1~ '\·1
I fi f Pro~
. P . th e\io .~
decided to take Dara into partners d t twic e ea
. lts ~t'i
this purpose, goodwill is to be value a
. f the past four years were : ~
or four years, whichever is higher. f oodw1U or
its for the purpose O g f
The annual prof
48,000;
Year Ended
30,300;
31 st March, 2021
31,200;
31 st March, 2020
42,200.
31st March, 2019
31st March, 2018
Calculate value of goodwill.
CALCULATION OF AVERAGE PROFIT
Solution : t Based on Past four years' Profits
Based on Past three years' Profits Year ended 31st March, 2021
481000
Year ended 31st March, 2021 , Year ended 31st March, 2020
30 300
Year ended 31st March, 2020 , Year ended 31st March, 201 9
31 200
Year ended 31st March, 2019 Year ended 31 st March, 2018

1,09,500 Total Profit (AJ

Total Profit (A)
3 Number of Years (BJ
Number of Years (8) I
36,500 Average Profit (A+ BJ
Average Profit (A + 8) 37~
average profit.
Four years' average profit is higher than three years'
25, i.e., t 37,925 x 2 = t 75,850.
Therefore, Value of Goodwill will be two times oft 37,9
Illustration 4 (Average Profit Method when Past Adju
stments are Made).
1st April, 2021. It was agreed that fu:
Ramesh purchased Bharat' s business with effect from
of average normal profit of the last ilifll?
firm's goodwill will be valued at two years' purchase
ended 31st March, were:
years. Profits of Bharat' s business for last three years
2019 t 1,00,000 (including an abnormal gain oft 10,000);
2020 t 1,10,000 (after charging an abnormal loss oft 20,000);
2021 t 85,000 (including non-business income oft 5,000).
Calculate value of the firm's good will.
Solu tion : Normal Proflt[f/
Years Adjustments
90,000
Profit for the year ended 31st March, 2019 (t 1,00,000 - t 10,000)
1,30,000
Profit for the year ended 31st March, 2020 (t 1,10,000 + f 20,000)

-----
80,000
Profit for the year ended 31st March, 2021 * ~ 85,000 - f 5,000)
3 00,000
Total Normal Profit for last three years ~

Total Normal Profit = ~~ 3' 00 ' 000 =t 1 00 000

Average Profit = - - - - -- ' '
Number of Yea rs 3
Goodwill = Ave rage Profi t x No. of Years' Purchase
= t 1,00,000 X 2 = t 2,00,000 .
ess incom e.
of good will, Net Profit will not include non-busin
 3 Valuation 3.9
Chapter · Goodwill: Nature and
. 5 (Average Profit Meth .
trauon od when Past AdJus tments are Made.)
f1J&JS d An i , ess on 1st A .
,, purchase ta s busin pnl, 2021 It was agreed to value goodwill at three
t!IIJ1ran e no rm al pro fit of th ·
~ , purchase of ave rag 1 t ita's business
e aS four years. The profits of An
'f'rs Jast {our yea rs we re:
cor tJie
year Ended
arch, 2018 90,000;
31s t M
31st March, 2019 1,60,000;
31st March, 2020 1,80,000;
3I st March, 2021 . 2,20,000.
books f
1·ng fur
ther £acts are noticed from the o account that:
fol10W 2018 ofit) of f 10 000
. the year ended 31st March' , an asset was sold at a gain (pr ' ·
1. purUlg 31st Ma rch 201 9 a ma chin 'd d ~ 30
g the year en de d y d ·
e got destro e m ac a ent an ' ,000
[)U1..;n ' '
2· " ' ·tten off as loss in Profit an d Loss Account.
was wn
2020 fi , ured due to oversight.
• g the year en de d. 31st March ' ' rm s assets were not ins
. . d
3, [)UfUl
anc e pre mm m be mg f 10,000 . It is a regular expense, mc urr e every year.
Insur
eaJculate the value of goodwill.
CALCULATION OF NORMAL PROFIT
solution:
Profit(t) Adjustment (t) Normal Profit (t)
Year Ended
90,000 (10,000) 80,000
8
31st March, 201 1,60,000 30,000 1,90,000
9
31st March, 201 1,80,000 (10,000) 1,70,000
31st March, 2020 2,20,000 ... 2,20,000
31st March, 2021 6,60,000

- t 6,60,000
A p fit Total Normal Profit 4 = t 1,65,000
ars
verage ro = Number of Ye
mber of Years' Purchase
Goodwill = Average Profit x Nu
= f 1,65,000 X 3 = f 4,95,000.
deducted from
insuring assets is a regular/recurring expense. Therefore, it is
s
Note: Insurance premium toward
the profit for the year ended 31st March, 2020.

d wh en Past Adjustments are Made).

Illustration 6 (Average Profit Metho
sha rin g pro fits an d losses equally. They agree to admit Dev
Om, Shanti and Namo are pa rtn ers of average
s pu rpo se, go od wi ll is to be valued at four years' purchase
for equal share. For thi
the pa st five years were:
profit of last five years. Profits for
-
31st March, 31st March,
31st March, 31st March,
Year Ended 31st March, 2020 2021
2018 2019
2017
1,40,000 (1,20,000)
Profiti(Loss) m 70,000 1,00,000
--- 30,000

lOn April, 2020, 5 cycles costing f

1st
ExJ>enses. Depreciation on cycles
20,
was
000
to
we
be
re purchased an d were wrongly debited to Travelling
charged @25% p.a . Calculate va
lue of goodwill.
 ·· ~·••u iam Ot Nor mal Prof it:
Year Ended Norm al Profit/(Loss) (f)
31 st March, 2017 30,00 0
31 st March, 2018 70,00 0
1,00,000
31st March, 2019
1,40,000
31st March, 2020 ( 1,05,000) (Loss) (Note )
31st March, 2021
2,35,000
Total Normal Profit

Ave rage Pro fit= Total Nor mal Prof it = t 2135,ooo

/5 = t 47,000
Num ber of Years
se
Goo dwi ll= Average Profit x Num ber of YearS' Pur cha
= f 47 000 X 4 = f 1,88,000.
N~~ I

March, 2021 :
Calculation ofAdjusted Loss for the year ended 31st 1,20,000
loss for the year ende d 31st March, 2021 20,000
Loss Ale
Less: Cost of Cycles wron gly debi ted to Profit and 1,00,000

r 20,000 (cycles) S,OOO

Add : Depreciation@ 25% p.a. on 1,05,000
Loss for the year
nts are Made).
Illustration 7 (Average Profit Method ·when Past Adjustme
They adm it Shu bh into partnership t
Luv and Kush are partners sharing profits equally.
yea rs' pur cha se of average profit of~
equ al share. Goodwill was agreed to be valu ed at two
fou r years. Profits for the last four years were:
Normal Profit/(Loss) (f)
Year Ended
70,000;
31st March, 2017
1,00,000;
31st March, 2018
55,000 (Loss);
31st March, 2019
1,44,000.
31st March, 2020
The books of account of the firm revealed as foIIows:
1. Firm had abnormal gain off 10,000 dur ing the
yea r end ed 31s t Mar ch, 2017.
year end ed 31s t March, 2018.
2. Firm incurred abnormal loss off 20,000 dur ing the
deb ited to veh icle s on 1st June, 201~
3. Repairs to car amo unti ng to ~ 50,000 was wro ngly
Stra igh t Lin e Met hod .
Depreciation was cha rged on vehicles @ 12% p .a. on
Calculate the value of Goo dwi ll.
Solu tion : CALCULATION OF NORMAL PROFIT
m
Year Ended

31st March, 2017

Profit/(Loss) (t)
70,000
Adjustments* (~

(10,000)
-/ ------
Normal Profit
60,000
1,20,000
31st March, 2018 I 1,00,000 20,000
I (1 ,00,000)
31st March, 2019 I
31st March, 2020 I
(55,000)
1,44,000
(45,000)
I 1,50,000
6,000
I
2,30,000 . /
I f:_
 d e term ... -- . 1.s
u ,~ula,
form of '{ea rs' purcna:::,c;.
"' Ult, pJy We ight ed Ave rage Pro fit (as 11
ed as a NUlJ'lber
It . th fit f pro fits . Pro fits ear,.._
e valu e of goo dwi ll. Express Pro fit•
IS Th f -,\\'(
. h d Average d Ave rag e pro . the trend. o yea rs. ere ore, tr\o
Goo dwi ll= Weig te }ljc h is d to ear lier
r the metho d . t
. We ight e
form anc eW are d
Rea son or Justification foru stng
financialreper s co Ill p d un de to Sim p1e A vera ge Pro
rele van t a . foll owe
Pas t pro fits sho w the tren d of
rece nt yea rs is mot prof its w hich is as coil lPare'[hi s me th d . partiCUla
by an ente rpri se in bett er ear s.d) trend s. O 18
. to rece n re d f rece nt Y 1
We ight age sho uld be give n . con side
. Met hod is pr o g (down- war
ofitf s Hin
We igh ted Ave rage Pro fit . htag e to the
d) or a
Me tho d as it gt.ves more we1g. . g (u pwa r
. show nsm
effe ctiv e whe n prof its
31 st March, 20
Ill
ustr atio . n 8. t five yea rs wer e: , 31st March, 202 0
1 h 2018
Pro fits of a firm for ilie as 50,0 00 36,00()
of the wei ght ed ave
:..:_:::,::_::::_:d~:.:_3_1s-tM-a-rc-:-h-:,2;0~17~ 31st Marc
48,00
•
0 , pur cha se
Year Ende
-===+-~Mioin,ooooo-
Profits (f)
.
4
th ee yea rs
ood will on the bas is of ; resp
2 3, 4 a nd
ecti vel y to
the pro fits for years e1

Cal cula te value of g 1

. ·n wei ghts , '
pro fit after assigru g oand 2021.
19,2 0 2
31st March, 2017' 2018,20 FWEIGHTED PROFI
T
CALCULATION O - . ht I Weighted Profit I
Solution: Weig
Profit (t) C D=Bxc
Year Ended
B
A 1 40,000
40,000 96,000
31st March, 201? 2
48,000 1,80,000
31st March, 2018 3
60,000 2,00,000
31st March, 2019 4
50,000
31st March, 2020 5 1,80,000
31st March, 2021 36,000
15 6,96,000
Total I

~ 6,9
ed Pro fit= _ _6,0
__00 - ~ 46, 400 .
Total of Weightight s 15
Weighted Average Pro fit= Total of We

Goo dwi ll= Weighted Average Pro fit x Nu mb er of Years' Purchase

= t 46,400 X 3 = t 1,39,200.
2. Sup er Profit Me tho d

amo unt of cap ital emp loy ed yie lds diff ere nt pro fits for dif fer ent ent erp rise !
Similar
of the cap ital em plo yed , it is calle
similar type of business eams profit as a per cen tag e
return. But a buyer's advantage lies in mal the excess of the nor ma l ret urn on cap ital E
pro•t;t · k iiit
The excess of actual/average pro1;t over nor
1 , zs nown as super pro, • . ed
Forexample,afirmhas cap itale1•
mp lo d f'{'
O rnp loy
,OO Oa ndi tsre.tum onc api tale
t 1' so,ooo. Norma re m on capital empJoIO,edOO
1 tu . ye . . . . o . '{ I (
Y m 51 nul ar bus me ss 1s 10 1/o, 1.e., ·
firm has super profit oH 50 000 .
' (1.e., t 1,50,000 - '{' 1,00,00Q).
 Chapter 3 . G00d .
toyed: Capital emplo ed will: Nature and Valuation 3.13
1·tal flllP . y means capital inve .
OP __,-t to detenrune the value of goodw-ill Ca . sted m the finn to carry on business. It is
-u}att-'V • • P 1tal empl d
(illL . bilities Side Approach: oye may be calculated by:
(i) 1,1a ital Employe d= Capital+ Reserves- Goodwill if . . .
OP - Non-trad e Investments. ' any existing m the books- Fictitious Assets
Side Approach:
.. f\ssets
(ll) ·tal Employe d= All Assets (except Goodwil l N
cap1 Assets) - Outside Liabilitie:. on-trade Investments and Fictitious
...:n == Super Profit x Number of Years' Purchase
c;oodww

Unless investme nts are specified to be trade investme t

&tote: Investmen h
,,. ts. n s, t ey are taken as Non-trade

TRADE INVEST MENTS AND NON-TRADE INVESTMENTS

, estments are those investme nts that are made in another enterprise for the furtherance
Trade ,nv
of own business .
.1
Non-traue Investmen ts are those investme nts that are made to earn revenue by investing
~ nds and not for the purpose of furtheranc e of own business.
surplus ,u

Examp1e 1 (When Trade Investments are Given).

cul t
Cal ae capital employe d by the above two approaches with the help of following Balance Sheet
-Liabilities t Assets t
Capital A/cs: Land and Building 1,50,000
Aman 1,00,000 Goodwill 30,000
Bhaskar 1,00,000 2,00,000 Investments (Trade) 50,000
General Reserve 90,000 Stock 50,000
Sundry Creditors 90,000 Sundry Debtors 70,000
Outstanding Expenses 10,000 Cash at Bank 30,000
Deferred Revenue Expenditure:
Advertisement Suspense 10,000

3,90,000 3,90,000
 Liabilities Assets
~
Capital A/cs: Land and Building
Amrit 2,00,000 Goodwill 3,CX),~
Sudhir 2,00,000 4,00,000 Investments 60tlJJ
General Reserve 1,80,000 Stock 1,CX)tlJJ
Sundry Creditors 1,80,000 sundry Debtors 1,CX)~
Outstanding Expenses 20,000 Cash at Bank 1,40,~
Deferred Revenue Expenditure: 60,~
Advertisement Suspense
7,80,000
So lut ion :
Ca pit al Employed
(i) Lia bil itie s Sid e Approach:
Partners' Capitals:
Am rit t
Sudhir 2,00,000
2,00,000 4,00,00)
Add: General Reserve
1,80,00)
Less: Investments (Non-trade)* 5,80,000
Fictitious As se ts- De fer red Revenu 1,00,000
e Expenditure 20,000
(Advertisement Suspense)
Goodwill
Capital Employed 60,000 1,80,000
(ii) As set s Sid e Approach: 4,00,0QO
Total Assets
Less: Fictitious As se ts- De fer red Reve 7,80,000
nue Expenditure
(Advertisement Su sp en se)
Goodwill 20,000
Investments (Non-trade)* 60,000
Su nd ry Creditors 1,00,000
Ou tst an din g Expenses 1,80,000
Capital Employed 20,000 ~
Jnl ess Investments are stated to be
trade mv .
estrnents, they are taken to be non-trad .
~
re, therefore, deducted to calcuJ~tP r::11
.
e mves tments-'fheY
 Chapter 3 •Goodwill: Nature and Valuation 3.1 S
. es
nleti.Jll average capital emp loye d is
c ... · 'd • th
~- th t profit is earn ed duri ng they consdi ered .
for calculating value of goodwill on e
t,a5iS a ear an capital employed changes from time . .
to time .
c;ooJWill under th is me th od is calculated by multiplying

r;0

5teP ·
, purchaSe.
ca1cuJating good will und er this meth od, the step

1. Calculate Average Cap ital Employed as follows·

super profit with the

s are:
agreed number of

.
Ope ning Cap ital Employed + Closing Capital Emp
loyed
2
Capital Emp loye d = Cap ital + Reserves - Fictitious
Assets (if any)
- Non -trad e Investments - Goodwill
Or
= All Assets (except Goodwill, Non-trade Investme
nts and
Fictitious Assets) - Outside Liabilities.
2. Calculate adju sted busi ness profit, i.e., actual average business profit. Profit earned
Step · firm for the year is adju sted for abnormal gains by a
and losses, if any and recurring expenses
that have not been incu rred . The profit so determin
ed is totalled and is averaged .
. Calculate norm al prof it or retu rn on average
Step 3· capital employed by applying the
following form ula:
Nor mal Prof it= Average Capital Employed x Normal Rate of Return
100
Note: Normal Rate of Return means the rate of
return normally earned by other firms in the
similar industry.

Step 4: Calculate Sup er Profit, i.e., Actual Average Profit - Normal Profit.
Step 5: Calculate valu e of good will as follows:
Goo dwil l = Sup er Profit x Num ber of Years' Purc
hase
Illustration 9 (Super Profit Method).
Afinn earned net profits duri ng the last three year
s as:
Year I II Ill
Profits m l S,OOO 20,000 22,000
. .
The capital investment of the firm 15 t 60,000 · Nor mal retu rn on the capital is 10%. Calculate
value of goodwill on the basi.s o f t hree year s' purc hase o f the averag e supe r profit for the last
three years.
Solution·
. t 18,000 + t 20,000 + t 22,000 = t 20,000
Average Profit = 3
Normal Profit = t 60,000 x 10/100 = t 6,000
Super Prof.it= Average p ro fit - Nor mal Profit
= t 20,000 - t 6,000 = t 14,000
Goo dwi. ll= Sup er p ro fit x Num ber of Years' Purchase
= t }4,000 3 = t 42,000.
X
 3.16 Double Entry Book Keeping- CBSE XII
hen Past Adjustments are Mad
e).
Illustration 10 (Sup er Profit Met~od w Me a Enterpris
es. They adm it Ashish as partner
Alok and Aakash are partners m M/s d g ill t 3 year
s' purchase by Sup er Profit Meth ~-eJ.
1st April, 2021. They agreed to value goo ; ' \pro fits.
whic h they decided to take average of last year
The profits for the last five Year Od f0r
s\\>ere:
Year ended t . . ft 000 from sale of fixed asset);
2,00,000 (Including garn o 25 '
31st March, 2017 1,70,000 (Including abnormal loss oft 50,000);
31st March, 2018
31st March, 2019 2•1O,OOO;
31st March, 2020 2,3o,OOO;
31st March, 2021 2,SO,OOO.
. • · ·1 b •
. th firm . t 15 00 000 and normal rate of retu rn m
Capital employed m e IS ' '
sum ar usmess is loo
Yo.
Calculate value of goodwill.
Solution:
CALCULATION OF ACTUAL NORMAL PROFIT
1.
Year Ended Profit R) Adjustment R) Normal Profit R)

31st March, 2017 2,00,000 (25,000) 1,75,000

31st March, 2018 1,70,000 50,000 2,20,000
31st March, 2019 2,10,000 ... 2,10,000
31st March, 2020 2,30,000 ... 2,30,000
31st March, 2021 2,50,000 ... 2,50,000
10,85,000
--a
Total Normal Profit = t 10,85,000 = t 2 17 000
Actual Average Prof it= N b
um er of y ears 5 ' ' ·
2. Calculation of Normal Profit:
Capital Employed = t 15,00,000
Nor mal Rate of Retu rn = 10%
Nor mal Profit = t 15,00,000 x 10/100 = ~ 1,50,000.
3. Calculation of Super Profit:
Sup er Prof it= Actual Average Profit - Nor mal Prof
it
= ~ 2,17,000 - t 1,50,000 = t 67,000.
4. Value of Goodwill:
Goodwill = Sup er Profit x Num ber of Years' Purc hase
= t 67,000 X 3 = ~ 2,01,000.
Illus tration 11 (Super Profit Method).
Average net profit of Hom e Dep ot expected in the
futu re is t 54,000 per year. Average capital
emp loye d in the business is~ 3,00,000. Nor mal profit
expe cted from capi tal invested in this class
of busi ness is 10%. The rem uner atio n of the part ners
is estim ated to be ~ 9,000 p.a.
Find the value of goodwill on the basis of two year
s' purc hase of supe r profit.
Solu tion :
Average profit
t t
54,000
Less: Partners' remuneration
9,000
Normal Profit on capital employed ft 3,00,000 x 10/10
0) 30,000 39,000
Super Profit ~
15,000
Goodwill, being two years' purchase of Super Profit = == :=:::::
t 15,000 x 2 =t 30,000. .
Partners' remuneration is deducted to determine normal profi
t because it is the value of their services
to the firm for handling business.
 ~OJ I ... - • • • . ··~ · vuiuatron of Stock
11111stfil rofit earned by a firm is f 75,ooo which. ).
ge P ·ta1 · ested . includes und
I t\\,ef3 t,a5iS• 'Jhe capt ~~ in the business is f 7,00 000 ervaluation of stock off 5,000 on
,#f oodwill of the firm on the basis of 5 fun ' and the nonna1 rate of return is 7%.
' .111ate g es the super fi
01~ A cttial Average Profit= f 75,000 + f pro t.
• Jt' ~
110 5' 000 (unde al
50111 • Nonnal Profit= Capital E rv ued stock) = f 80,000
mp1oyed (Investm )
= f 7 00 000 x ent >< Nonna! Rate of Retum/100
• I 71100 t 49,000
I :

Super Profit= Actual Averag p fi

e ro t- Normal Profit
. = f 80,000 - f 49,000 = f 31,000
Goodwill= f 3tOO0 x 5 = t l,SS,000.
d rvaluation of stock decreases net profit. Hence it . dd
,iote: Un e ' is a ed to determine actual average profit.
(Super Profit, Overoaluation of Stock)
. n 13
1
,11ustta00 ·
JJl fit arned by a firm is f 2 50 000 hich ·
· A,;erage pro e ' ' w includes overvaluation of stock off 10 000
1 basis Capital invested in the business · t 14 00 000 '
tit average ·. . . IS and the nonnal rate of return is 15%
1
, , .
. Calculate goodwill of the firm on the basis of 4 times the super profit.

Solution:
t 2,50,000
Average Profit=
1

()vervaluation of Stock = t 10,000

Actual Average Profit = t 2,50,000 - t 10,000 (Note) = t 2,40,000
Normal Profit= Capital Employed (Investment)>< Nonna! Rate of Return/100
15
= t 14,00,000 X = t 2,10,00Q
100
Super Profit= Actual Average Profit- Normal Profit
= t 2,40,000 - f 2,10,000 = f 30,000
Goodwill= Super Profit x 4
= t 30,000 X 4 = f 1,20,000.
I Note: Overvaluation of stock is deducted as it increased the net profit.

Illustration 14 (Calculation of Average Profit).

On lst April, 2019, a firm had assets of ~ 3,00,000 including cash of t 5,000. Partners' Capital
Accounts were f 2,00,000 and the Reserve being the rest. If the normal rate of return is 10%
~d!he goodwill of the firm is valued at f 2,00,000 at four years' purchase of super profit, find
average profit of the firm.
Solution:
Goodwill = Super Profit x Number of Years' Purchase
~ 2,00,000 = Super Profit x 4

Super Profit = f 2,00,000 = f 50,000

4
3.18 D
0Uble Entr
y Book Keeplng- CBSE XII
Norrnal p . al Rate of Return/100
rofit == Capital Employed x Norm
= ~ 3 00 000 x 10/100 === f 3o,ooo
Super p ro fi t = Average
' ' Profit-. N ormal Profit
f 50,000 = Average Profit - f 30,000
Average Profit = ~ 50 000 + t 30,000 == f BO,OOO.
Note: As O . . • ' be nil. Thus, capital employed is equal
utside hab1lities are not given, they are assumed to tola\q1
1llustrar A.i,
ton 15 (Calculation of Average Profit). :
M/s Hi-Tech India has assets oft 5,00,000 whereas liabilities are: Partners' Capitals-~ 3
General Reserve - ~ 60 000 and Sundry Creditors-f 90,000. If normal rate of return'~\1
and goodwill of the fi~ is valued at~ 90,000 at 2 years' purchase of super profit, find a~ 1~
profit of the firm. erq~
Solution: Goodwill= Super Profit x Number of Years' Purchase
t 90,000 = Super Profit x 2
Super Profit= t 90,000 = t 45,000
2
Capital Employed = Assets_ Outside Liabilities (Creditors)
= t 5,00,000 _ t 90,000 = t 4,10,000
Or
= Partners' Capitals + General Reserve
= t 3,50,000 + t 60,000 = t 4,10,000

Normal Rate of Return= 10%

1
Normal Profit = t 4,10,000 x 1 = {41,000io
Super Profit= Average Profit- Normal Profit
Average Profit= Super Profit+ Normal Profit
= t 45,000 + t 41,000 = t 86,000.
Illustration 16 (Calculation of Capital Employed).
Average profits of a firm during the last few years are t 80,000 and the normal rate of returnu
a similar business is 10%. If the goodwill of the firm is~ 1,00,000 at 4 years' purchaseofsu~
profit, find the capital employed by the firm. (CBSE 201l

Solution:
Goodwill at 4 years' purchase of Super Profit = ~ 1,00,000
Super Profit = t 1,00,000/4 = t 25,000
Average Profit - Normal Profit = Super Profit
Normal Profit= Average Profit - Super profit
= t 80,000 - t 25,000 = t 55,000
Capital Employed = 100/NRR x Normal Profit
= t 55,000 X 100/10 = t 5,50,000.
 t,etw een l'IVCICJ~I:' nu nt ands uper Profit
01ffl1t
,,,c
,,. ,,
I
A._,.,,_ Sup,,Prdf
IIt Is ave
d years.
- -p
rage of the norm al ro,,ts of past
c.
- of averag e profit over
It Is the e xce
agree ss
,_,,;ri9 . norm al profit.
is not rel
INorm al rate of return pro
teof Retum in the ered whlle-
I calculation of average fit. evant Normal rate of return Is consid
~, 1R • _ calculatlng thesuper profit.
.
ed Avera ge cap ital employed is not con sid ered taken into
, ital Employ , fit. Average capital employed is
11ecaP wh l1eca 1cu 1atmg average pro er profit.
' ~.,,
,. '
, . Average profit is relevant for
Avera Proflt
ge
account whilecalculating the sup
per Profit
of Valuing d and Capita lisa tion Super profit Is relevant for Su
Method, Super Pro_fit Metho per Profit
,i,varice will. Method and Capitalisation of Su
II Method of valuation of good Method of valuation of good will.
i~

. Jjsation Meth od
pitalisation M eth od , go od will can be valued us·mg tw o methods:
3.capita Ca .
der the Av erag e Pr of i t; or
Un . rsation of •
. Capita I ofi t.
(i) ·t lisation of Super Pr
(ti) Cap1 a
·talisation of Averag. e .Profit .
ID capt du ctm g ca pital emplo yed (i.e ., Net Assets as on the
lculated ~y ~e
Under this meth~d, good~1ll 1s ca talzsed va lue of average profit on the basis of Norm
al Rate
siness fro m the ca p1
.rva/uation) m the bu al f th b . s 1s . d rmm .
ed by capitali sing average profit earned
• usmes ete
efRetum, Capitabsed v ue o e
Ja/f OJ

at the normal rate of profit. lows:

ating good wi ll un de r th is method, the steps are as fol
forcalcul
al profit earned.
Step 1: Calculate average norm
va lu e of th e firm by us in g the formul a given be low :
Step 2: Calculate capitalised
Average Profit x 100
ali se d Va lue of th e Bu sin ess = N ma1Rate of Return (Profit)
Capit or
0 an nu all y an d firms normally earn 10%, the total
If a firm earns a profit
o ft 16,00
100/10).
sed va lue of the firm wi ll be t 1,60,000 (i. e., t 16,000 x
capitali ll.
lue of Ne t As se ts, on th e date of valuation of goodwi
Step 3: Determine the va titiou s
(o th er th an go od wi 11 , no n-trade investmen ts and fic
Net Assets = All Assets
ts) at th eir cu rre nt va lu es minus outside liabilities.
asse Step 3).
5t 4= Goodwill = Capitalised Value of the Business (as pe
r Step 2) - Net Asse ts (as pe r
ep
. Method).
lllustrat.ion 17 (Capzt. alz.satzon
are
no rm al ra te of re tu rn be ing 10%. Asse ts of the firm
; 7firrn earned t 60,000 as pr
ofit, the
s are t 2,4 0,0 00 . Find the value of goodwill by
and Liabilitie
Cl'~~'~ ~excluding goodwill) ethod .
p alisation of Average Profit
M
Solution:
e Finn Average Profit x 100
Total Capitalise d Va lue of th
==
Normal Rate of Return
== t 60, 000 x 100
lO == f 6,00,000
 -- - Liabilities
ble Entry so ok KeeP"'~ Total As se ts
00 t 2, 40, 00 0 == f 4, 80 ,0 00
~ 7 20,0 - . d "a lu e of th e Fu. rn - Ne
3. 20 Dou ts ==
Net Asse
== ' , t A-
. _ Total Ca pi. talise v00 ,
0 •"\SSets
Goodwill : f 6,00,000 - f 4,80 == f 1,2 0,0 00 .
,

18 Th ei r fixed ca pi ta ls Were
•or de sig ne r fi ~- th ei r cu ~
V
!llustration ·
i as
ariners in an ;nte~redit ba la
ha nd J(aran wereorvely. There
wehred a balance of rtn00'~r
rr en t accounts of~ 6
nc e~ ~ 00 0 in G en er al lXl,~
Reserve. 'fhllo,11\
spec firm a sh ip fo r 1/
an d t 4,00,000 re ectively. . . 4t h sh ar e in thepe &~
an d t 5,00,000 '~f.biJity. '!h
'Ih • ·tted Radhika Jil to fiv pa
e ye ar s w er e f 5, 00,000. Ca r06
did not ha v; ;;: ve ra ge prof ey a~ ~e firm for th e la st ra ge pr of its m lcu late \
of the firm . e . 1 f the firm
O O
its o
by ca
pi tal isation of av e et ho d. Th e no nn a1 '•~II,
(CBS£ 2-02~
value f goodwi•l s 1s
return in the busmes
. 10o ,•
10
d v, Iue o f the Fi rm - Ca pi ta m
. IE I ~
dwill = Capitalise _a OO p oy ed
Go o fNormal Ra te of Re tu rn
So lu tio n: . of the Fi rm = Averag e Pr of it x 1
Capitalised Value 10 == f 50 ,0 0, 00 0
= t 5,00,000 x lOO/ , C ap ita l+ Y as h' s Cu rre
d _ Yash' s Capi.tal + K ar an s nt Acco ~,
Capital Employe - + Kara un t + G en
n's Cu rr en t A ~c : f 40 0, 00 er al Re se rv e
11"'ij

:: t 6,00,000 + t 4,00,00 0 + f 5,00,000 + { 1,00,ll)J

I

- t 20 00,000
Goodwi.ll =
- , 000 - f 20,00,000 == f
t 50,00, 30 ,0 0, 00 0.
Ill us tra tio 19.
Bharat an· dn Bh ushan are partners m. retail business. Ba la nc es
a m· th ei r Ca pi ta l an d Curre
Accounts as on 31st M ar ch, nt
2020 were: Ca pi ta l A cc ou nt
Cu rr en t Account
Bharat t 2 00 00 0 t so,ooo
t : 4 o:ooo
Bh h
Theusfiran
m earned an average profi ft 2 t 10,000 (Dr.)
of goodwill. t o 90' 000 . If the no rm al ra te f
o re tu rn IS· 10°/co, find the value
Solution:

Capitalised Value of ilie Bu 100

siness= NAv
or meralagRa
e Pr of it x 10 0 =
te of Re tu rn t 90 , 000 x _
10 = t 9,00,00J
Capital Employed = t 2,00,0
00 + t 2, 40 ,0 00 + t 50 ,0 00
- t 10,0 00 = t 4,SO,(XX)
Goodwill = t 9,00,000 - t
(ii ) Ca pi ta lis at io n of Su 4, 80 ,0 00 = t 4, 20 ,0 00 .
per Profit
U nd er th is method, good
will is calculated by ca pi ol
re tu rn. Th us , as a first step ta lis in g su pe r pr of it at
Super Profit is de te rm in ed th e no1:1'al ratedet
Su pe r Pr of it Method, which on th e sa m e ba si s as is de
of go od will. is ca pitalised at th e N or m te rm m ed un E
al Ra te of R et ur n to de te
rm in e the va1u
Fo r ca lc ul at in g th e goodwi
11 un de r this m et ho d, th e
st ep s ar e:
Step 1: Calculate Capital Em
ployed (i.e., Ne t Assets as on
N et A ss et s ~ All Assets (e th e da te of va lu at io n) of
th e {in n:
xcept go od w ill , no n- tra de
- Ou tsi de Liabilities. in ve st m en ts an d fic tit io
us assets)
2 Calculate N or
5tep : m al Profit on Ca pi ta l Em
pl oy ed by us in g th e fo llo
No rm al Pr of it = Capi.tal Em w· f
pl oy ed x N or m al Ra te of
Re m
turn/IOO. g or rn u a..
1
 d . n 3 .21
Chapter 3 . G0 0 will: Nature and Valuatio

e Profit Of past years, ,.· e., three to fi

_., te Averag ve years.
lcw a p fi
3' Ca Super Profit,
i.e., Average ro t - Normal Profit.
C Jcu late
5,eP4:· a 100
l S u p e r P ro fit x -.
o f R tum
5teP dwil ==
Normal Rate e
t
S: coo f 60,000 and th t 48,000, su per profi
¢ rage
where ave
p ro fi t is
N
rmal p
_
ormal Rate 0~
ro~t is
;o
.
odwill
Th us, valu e o f go
· 1 f 4 8 ,0 0 0). etu m JS 10¼
e., f 60,000 -
fof exaJI1{2 ~00 (i. 00 1 0 0 /10 ).
.e., f 12,0 x
111 be (( L2'01000 (i ie d to
.d d
be Trade Invest ments ' they are cons , ere to be
Non -tra de
sp ec if
1t
be ss ·n ve st ments are te C .
ucted to calcula ap,tal Employed
.
1viJ} ' eref o re , d ed
unte ents. Th ey are, th
.i0te:
" investm .
5
tratio rt 20 .
of it of the fi
nn is f 1,5
In
0 ,0
th e
0 0
sa
. T
m
o
e
ta l ta ng ib le
e: st:
ass t . th
e f
type of b u s in , e norm rate o f
ir ; are t 14,00,~ 0 1an
return JS 0 %
d

are t 4,00,000.
[}111
Ave:ag~P;ili ties d
tside a mp1oye . per Profit Meth
od.
ofthe capital e
11
lis a tio n o f S u
of goodwill b
y Capita
~a1CLJ1a te value
Liabilities
T al 'r1angJb .
le A ssets - Outside
soJution: Capital Employed = ot f 4 ,00,000 = t 10,00,
000
= t 14 ,0 0 ,0 0 0 -
orm a l R ate of Return/JOO
loyed x N
al P ro fi t= Capital Emp
Norm 10
0 ,0 0 ,0 0 0 X lO O = f 1,00,000
= f 1
- Normal Pro
fit
e ra g e P ro fi t
Av
Super Profit= 0 0 - t 1, 0 0,000 = t 50,00
0
= t 1,5 0,0
fit x 10 0 t 50,000x 100 - t 5 00' 000 ·
P
Super- - - - - = ro - '
- - rn 10
l = - o f R e tu
Goodwil Normal Rate nd the norm al
fe w y e a rs a
e last
lll ustration 21. ro fi t o f t 1, 0 0,000 during th oodwill by:
ep of G
A bu siness has
earned averag 1 0 % . F in d out the value
ss is
similar busine
rate of return in
e r P ro fit M e th o d; and
' p u rch a se o f super profit.
(i) CapitaHsati
on of Sup ill is valued a
t 3 years (Delhi 2011)
th e g o o d w 1, 80, 0 00 .
(ii) Super Profi
t Method if d its ex ternal lia
bilities f
0 ,0 0 0 a n
ness were t 10
,0
Assets of the busi
Soluti on: :
alisatio n o f S up er Profit Method x 1 0 0 = t I,B0,0OO.
(i) As pe r Capit = t 18 , 00 0
il l= S u p e r Profi t x 100 10
Go o d w te o f R e tu rn
N orm al R a
(ii) As M et h od : hase
per Super Pro fit
fit x N u m b e r o f Years ' Purc
Goo dw il l = S
u p er Pro
f 54,000.
= f 18,000 X 3 =
Working Notes:
oy ed - A ets - External Liabilities
1. Capital Empl - ss
- f 10,oo,ooo - r 1,ao,000 = r
8,2 0,000. 1o
x _ = f 82 000.
- rn _ f 000 ,
• o rmal Rate of R
e tu 8,20' 100
2. al Profit == Ca ploy ed x N -
Norm Pita/ Em 100
fit == Ave ra N
3. Super Pro ge Profit - ormal Profit
== t 1 oo 00 0.
, , o- r a2,ooo = f 1a,00
 cssE >< 11
ble Eritr}' eoo k K ee pi ng -
3.22 oou 00 000 a n d K ""' 2 0 0 0
II1
. 22
ustrat1on ~ e rs fh r cap
in a firfOfi rne1
. itals are: Jt
fi t of
1'1
50 000. A ss u m
, , 00. D ~
in g th at the gt~
I and Kare pa ch 20 earned a pro_Il of " , '
10 the r 1ue of th e firm: no""- )
31
ende d ~ t M ar ,
zo%, ca th e va goodWl ·•t1q1 ;
of return is . lisat lculate d· and . , '
ion Metho '
{i) By Capita oodwill is va 1u e d at 2 y ea rs p u rc h as e of sup
fit Method if the
(ii) By Super pro g er Pro~t
(Forei~ .
Solution : . . ~~
(i) Capitalisatwn Method: f ir tn
. al'
Total Cap1t ise d Value of the p
A v er ag e ro fit x 1 0 0 ~ 1 ,5 0 ,0 0 0 X 100
= = 20
N o rm a 1Rate o f R e tu rn == ~ 7 50
al C it al is ed V al f B . ' ,OOo
Goodwill = Tot u e o u sm e ss - C ap it al Em
OaOpO =,: 5 00 000*
;:;: t 7,50, - '\ = ~ 2,50,000 . pl
•capital Employed _ itals of Jan d K
f I
oyed
- Cap = ~ 3,00,000 + ~ 2,
00,000 + ~ 5,00,ooo
(ii) Super Profit th
Me d: 0
. .
Normal Profit -_ C ·tal E m p lo y ed x N o rm a
ap1 l R at e o f R et u m
°t 5,00,000 X 20/1 /1 0 0
00 = t 1,00, 000
Average Profit = 1 5
't , 0,000
Super Pro fi t_ A
- verage P ro fi t - N o rm a l P ro fi.
= 't 1,50,000 - t
~ 1,00,000 = t
Goodwill = S u p 5 0 ,0 0 0
er P ro fi t x N u m
b e r o f Y ea rs ' P
= ~ 50,000 X 2 u rc h as e
= ~ 1,00,000.
Illustration 23 .
From the followin
g information, ca
lculate v al u e o f
(i) At three year g o o d w il l o f M
s' purchase of A /s S h ar m a & Gup
(ii) At three year ve rage P ro fi t. ta:
s' purchase of S
(iii) On the basi u p er P ro fi t.
s of Capitalisatio
(iv) O n the basi n of S u p er P ro fi
s of Capitalisatio t.
n of A v er ag e P ro
Information: fi t.
(a) Average Cap
ital Em ployed - t 10,0
(b) N et Profit/Los 0,000.
s of the firm for
(Profit); 2 0 2 1 - ~ th e p a st y ea rs :
2,70,000 (Profit) 2 0 1 9 -~ 1,60,0
. 00 (Profit) ; 2 0 2
(c) N o rm al Rat 0 -t l ,4o,lXXl
e of Ret urn o n ca p it al is
(d) R em u n er at 11 %.
"' io n to e h
" 2,500 p er m o n ac p ar tn er fo .
th . r h is se rv ic e to b e
tr e a te d as a ch
(e) A ss et s (e x cl arge on profit-
u d in g g o o d w il
Solution: l) -~ 11,00,000;
L ia b il it ie s- ~
1,00,000 .
(i) Calculation o
f Goodwill t th
a ree years' purchase
of Average Pro.fit:
A v er ag e Profit=
= ~ 1 ,6 0 ,0 0 0 + ~ 1 ,4 0 ,0
0 0 + ~ 2 ,7 0 ,~

~ 5,70,000 3
== - - -
= ~ 1 ,9 0 ,0 0 0
3
 ·
Chapte r 3 . Goodw ill: Nature and Valuat ion 3 • 23
Norm al Profi t=~ 1,90,0 00 - Remu nerati on of Partn ers
_.Average = ~ 1,90,0 00 - (~ 2,500 x 2 x 12)
= ~ 1,90,0 00 - ~ 60,000 = ~ 1,30,0 00
Good will = Avera ge Norm .al Profit x No. of Years ' Purch ase
= ~ 1,30,0 00 X 3 = ~ 3, 90,000 .
. ; Goodw ill at three years' purcha se of Super Profit:
C tculation 0'J
(ii) a Norm al Profit = Capit al Empl oyed x Norm al Rate of Retum/ 100
= ~ 10,00, 000 X 11/100 = ~ 1, 10,000
Super Profi t= Avera ge Profit - Norm al Profit
= ~ 1,30,0 00 - ~ 1, 10,000 = ~ 20,000
Good will = Super Profit x No. of Years ' Purch ase
= ~ 20,000 X 3 = ~ 60,000 .
... Calculation of Goodw ill under Capita lisatio n of Super Profit:
~
Good will= Super Profit x - - - -100
-----
Norm al Rate of Retur n
= ~
20,000 x 100/11 = ~ 1,81,8 18.18 or~ 1,81 ,818.
(iv) Calculation of Goodw ill under Capita lisatio n of Avera ge Profit:
Goodw ill= Total Capit alised Value of Busin ess - Net Asset s
. . . Avera ge Norm al Profit x 100
Total Capita lised Value of the Firm = N
orm al R ate o f R eturn
~ 1,30,0 00x 100
= - - - - - - = ~ 11,81, 818.18 o r ~ 11,8 1,818
11
Net Asset s= Total Asset s (exclu ding goodw ill) - Outsi de Liabil ities
= t 11,00 ,000 - t 1,00,0 00 = t 10,00, 000
Good will= t 11,81 ,818 - t 10,00 ,000 = t 1,81,8 18.
~
.... @ ~1;~;

~ ) Scan QR Cod e for Add ition al Illus trati ons

I

:;.;;all_
'