GOD’s EYE

From Noob to God Level

S. Particulars Page Noob Power Growth Pro God
no. No. Level Level Level Level Level
1. Goodwill Meaning 3
2. Features of 3
Goodwill
3. Types of Goodwill 3
4. Factors Affecting 3-4
Goodwill
5. Methods of 4
Valuation of
Goodwill
6. Interest On 4
partner’s Loan
7. Average Profit 4-5
Method
8. Weighted Average 5-6
Profit Method
9. Super Profit 6
Method
10. Capitalisation of 6
Average profit
method
11. Capitalisation of 7
Super Profit
method
12. Questions for
Practice

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 Goodwill Valuation
Goodwill is good name or the reputation of the business, which is earned by a firm through
the hard work and honesty of its owners. If a firm renders good service to the
customers, the customers who feel satisfied will come again and again and the firm will
be able to earn more profits in future.

In Accounting we can say goodwill is the future earning capacity of the business.

Features of Goodwill
1. It is an intangible asset.
2. It is helpful in earning excess profits.
3. Its value is liable to constant fluctuations.
4. It is valuable only when entire business is sold: Goodwill cannot be sold in part. It
can be sold with the entire business only. The only exception is at the time of admission
or retirement of the partner.
5. It is difficult to place an exact value on goodwill: This is because its value may
fluctuate from time to time due to changing circumstances which are internal and
external to business.

Goodwill is divided into two categories.

I. Purchased Goodwill: Purchased goodwill means goodwill for which a consideration has
been paid e.g. when business is purchased the excess of purchase consideration of its
net assets i.e. (Assets – Liabilities) is the Purchased Goodwill. It is separately recorded
in the books because as it is purchased by paying in form of cash or kind.

Characteristics
(i) It arises on purchase of a business or brand.
(ii) Consideration is paid for it so it is recorded in books.
(iii) Shown in balance sheet as on asset.
(iv) It is amortised (depreciated).
(v) Value is a subjective judgment & ascertained by agreement of seller & purchaser. It
is approximate value and cannot be sold separately in the market or in parts.

II. Self-generated Goodwill also called as inherent goodwill. It is an internally

generated goodwill which arises from a number of factors that a running business
possesses due to which it is able to earn more profits in the future.
Features
(i) It is generated internally over the years.
(ii) A true cost cannot be placed on this type of goodwill.
(iii) Value depends on subjective judgment of the value.
(iv) As per Accounting Standard 26 (Intangible Asset), it is not recorded in the books
of accounts because consideration in money or money’s worth has not be paid for it.

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 Factors Affecting the Value of Goodwill
1. Efficient management.
2. Quality of products.
3. Location of business.
4. The Longevity of the business.
5. Monopolistic and other Rights.
6.Other factors:
(i) Good industrial relations.
(ii) Favourable Government regulations
(iii) Stable political conditions
(iv) Research and development efforts
(v) Effective advertising to establish brand popularity
(vi) Popularity of product in terms of quality.

Situation where goodwill valuation is Required: -

1. When profit sharing ratio changes
2. On admission of a partner
3. On Retirement or death of a partner
4. When amalgamation of two firms taken place
5. when partnership firm is sold.

Method of valuation of goodwill:

It is very difficult to assess the value of goodwill, as it is an intangible asset. In case of
sale of a business, its value depends on the mutual agreement between the seller and the
purchaser of the business. Usually, there are three methods of valuing goodwill:

1. Average profit method

2. Super profit method
3. Capitalization method

Average Profit Method

Goodwill = Average Profits Number of years of purchase

Number of years of purchase means for how many years the firm will earn the same
amount of profits in future.

Average Profits = Total Profits/Number of years

Adjustments while calculation of goodwill: -

(i) Abnormal income of a year should be deducted out of the net profit of that year.
(ii) Abnormal loss of a year should be added back to the net profit of that year.
(iii) Income from investments should be deducted out of the net profits of that year,
because this income is received from outside the business.

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 Weighted Average Profit Method: This method is a modified version of average profit
method. In this Method each year’s profit is assigned a weight. The highest weight is
attached to profit of most recent year.
Eg: 2011-1, 2012-2, 2013-3, 2014-4.

Each year profits are multiplied by assigned weights. Products are added & divided by
total number of weights. Weighted average is multiplied by agreed Number of years of
Purchase.

Weighted Average Profit: = Total Product of Profits

Total of Weights

Goodwill = Weighted Average Profit No. of years of purchase.

Weighted average profit method is considered better than the simple average profit
method because it assigns more weightage to the profits of the latest year which is more
likely to be earned in future. This method is preferred when profits over the past
years have been continuously rising or falling.

Super profit Method: In this method goodwill is calculated on the basis of surplus
(excess) profits earned by a firm in comparison to average profits earned by other firms.
Super Profit are the excess of actual profit over normal profits. Where Normal profits
are profits earned by similar business.
Goodwill = Super Profit Number of years of purchase

Super Profit = Average profit – Normal profits

Normal Profit = Investment (Capital Employed) Normal Rate of return

100
Capital Employed = Capital + Free Reserves – fictitious Assets (if any),

or

All Assets – (Goodwill, fictitious assets, and non-trade Investment) – Outsider’s

Liabilities

Capitalised Method Under this method, goodwill can be calculated in two ways:
(A) Capitalisation of Average Profit Method:
1. Calculate capitalized value of the firm
Capitalised value of the firm = Average Profits * 100
Normal rate of return
2. Calculate the value of capital employed

Net Assets or Capital employed = Total assets – Outside liabilities

3. Calculate Goodwill

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 Goodwill = Capitalized value of average profits – Capital Employed

(B) Capitalisation of Super Profit Method:

1. Calculate Super Profit
Super Profit = Average profit – Normal Profit
2. Calculate Goodwill
Goodwill of the firm = Super Profits * 100
Normal rate of return.

Question 1:
Goodwill is to be valued at three years' purchase of four years' average profit. Profits
for last four years ending on 31st March of the firm were:
2018 − 22,000; 2019 − 38,000; 2020 − 29,000; 2021− 24,000.
Calculate amount of Goodwill.

Question 2:
Profits for the five years ending on 31st March, are as follows:
Year 2017 − 2,00,000; Year 2018 − 1,28,000; Year 2019 − 6,20,000; Year 2020
− 2,65,000 and Year 2021 − 3,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average
profit.

Question 3:
Calculate value of goodwill on the basis of three years' purchase of average profit of
the preceding five years which were as follows:
Year 2021 2020 2019 2018 2017
Profits 8,00,000 15,00,000 18,00,000 4,00,000 (Loss) 13,00,000

Question 4:
A, B and C are partners in a firm sharing profits and losses equally. They decide to take
D into partnership from 1st April, 2021 for 1/5th share in the future profits. For this
purpose, goodwill is to be valued at 100% of the average annual profits of the previous
three or four years, whichever is higher. The annual profits for the purpose of goodwill
for the past four years were:
Year Ended Profit
31st March, 2021 1,88,000;
31st March, 2020 2,81,800;
31st March, 2019 2,87,200;
31st March, 2018 1,53,200.
Calculate the value of goodwill.

Question 5:
Calculate the value of firm's goodwill on the basis of one and half years' purchase of
the average profit of the last three years. The profit for first year was 80,000, profit

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 for the second year was twice the profit of the first year and for the third year profit
was one and half times of the profit of the second year.

Question 6:
Raghu and Anand are partners in a firm sharing profits and losses in the ratio of 2:1.
They decide to take Ram into partnership for 1/4th share on 1st April, 2024. For this
purpose, goodwill is to be valued at four times the average annual profit of the previous
four or five years, whichever is higher. The agreed profits for goodwill purpose of the
past five years are:
Year 2020 2021 2022 2023 2024
Profits 14,000 15,500 10,000 16,000 15,000
Calculate the value of goodwill.

Question 7:
Amar and Akbar were partners sharing profits and losses in the ratio of 2 :1. They
admitted Anthoney as a partner for 1/5th share in profits. For this purpose Goodwill of
the firm was to be valued on the basis of three years' purchase of last five years'
average profit. Profits for the last five years ended 31st March, were:
Year 2021 2022 2023 2024 2025
Profit 1,25,000 1,00,000 1,87,500 (62,500) 1,25,000
Calculate Goodwill of the firm after adjusting the following:
Profit of 2021-22 was calculated after charging 25,000 for abnormal loss of goods by
fire.

Question 8:
Manav and Vinay are partners sharing profts in the ratio of 3:2. They decided to admit
Mohit as a partner from 1st April, 2024 on the following terms
(i) Mohit will be given 2/5th share of the profit.
(ii) Goodwill of the firm will be valued at two years' purchase of three years' normal
average profit of the firm.
Profits of the previous three years ended 31st March, were
2024- Profit 30,000 (after debiting loss of stock by fire `40,000).
2023- Loss 80,000 (includes voluntary retirement compensation paid `1,10,000).
2022- Profit 1,10,000 (including a gain (profit) of 30,000 on the sale of fixed assets).
Calculate the value of goodwill.

Question 9:
Tarun purchased Jaya’s business with effect from 1st April, 2024. Profits shown by
Jyoti's business for the last three financial years were:
2022 1,00,000 (including an abnormal gain of 12,500).
2023 1,25,000 (after charging an abnormal loss of 25,000).
1,12,500 (excluding 12,500 as insurance premium on firm's property- now to
2024 be insured).

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 Calculate the value of firm's goodwill on the basis of two year's purchase of the
average profit of the last three years.

Question 10:
A, B and C are partners sharing profits and losses equally. They agree to admit D for
equal share of profit. For this purpose, the value of goodwill is to be calculated on the
basis of four years' purchase of average profit of last five years. These profits for the
year ended 31st March, were:
Year 2020 2021 2022 2023 2024
Profit/(Loss) 1,50,000 3,50,000 5,00,000 7,10,000 (5,90,000)
On 1st April 2021, a car costing 1,00,000 was purchased and debited to Travelling
Expenses Account, on which depreciation is to be charged @ 25%. Interest of 10,000
on Non-trade Investments is credit to income for the year ended 31st March 2023 and
2024.
Calculate the value of goodwill after adjusting the above.

Question 11:
Bhanu and Pooja are partners sharing profits and losses in the ratio of 3: 2. They admit
Kishor into partnership for 1/4th share in profit. Kishor brings in her share of goodwill
in cash. Goodwill for this purpose is to be calculated at two years' purchase of the
average normal profit of past three years. Profits of the last three years ended 31st
March, were:
2021 - Profit 50,000 (including profit on sale of assets 5,000).
2022 - Loss 20,000 (including loss by fire 30,000).
2023 - Profit 70,000 (including insurance claim received 18,000 and interest on
investments and Dividend received 8,000).
Calculate the value of goodwill. Also, calculate goodwill brought in by Kishor.

Question 12:
Sohan purchased Anmol's business on 1st April, 2024. Goodwill was decided to be
valued at two years' purchase of average normal profit of last four years. The profits
for the past four years were:
31st March, 31st March, 31st March, 31st March,
Year Ended 2021 2022 2023 2024
Profits 80,000 1,45,000 1,60,000 2,00,000
Books of Account revealed that:
(i) Abnormal loss of 20,000 was debited to Profit and Loss Account for the year ended
31st March 2021.
(ii) A fixed asset was sold in the year ended 31st March, 2022 and gain (profit) of
25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2023 assets of the firm were not insured due to
oversight. Insurance premium not paid was 15,000.
Calculate the value of goodwill.

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 Question 13:
Profits of a firm for the year ended 31st March for the last five years were:
31st March, 31st March, 31st March, 31st March, 31st March,
Year Ended 2020 2021 2022 2023 2024
Profits (₹) 20,000 24,000 30,000 25,000 18,000
Calculate value of goodwill on the basis of three years' purchase of Weighted Average
Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years
ended 31st March, 2020, 2021, 2022, 2023 and 2024.

Question 14:
Ram and Dhruv are partners sharing profits in the ratio of 6 : 4 and for the last four
years they have been getting annual salaries of 50,000 and 40,000 respectively. The
annual accounts have shown the following net profit before charging partners' salaries:
Year ended 31st March 2022 − 1,40,000; 2023 − 1,01,000 and 2024 − 1,30,000.
On 1st April 2024, Zakir is admitted to the partnership for 1/4th share in profit
(without any salary). Goodwill is to be valued at four years' purchase of weighted average
profit of last three years (after partners' salaries); Profits to be weighted as 1: 2: 3,
the greatest weight being given to the last year. Calculate the value of Goodwill.

Question 15:
The capital of the firm of Anuj and Benu is 10,00,000 and the market rate of interest is
15%. Annual salary to the partners is 60,000 each. The profit for the last three years
were 3,00,000, 3,60,000 and 4,20,000. Goodwill of the firm is to be valued on the basis
of two years' purchase of last three years average super profit. Calculate the goodwill
of the firm.

Question 16:
Gupta and Bose had a firm in which they had invested 50,000. On an average, the
profits were 16,000. The normal rate of return in the industry is 15%. Goodwill is to be
valued at four years' purchase of profits in excess of profits @ 15% on the money
invested. Calculate the value goodwill.

Question 17:
The total capital of the firm of Sakshi, Mehak and Megha is 1,00,000 and the market
rate of interest is 15%. The net 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' super
profits. Calculate the goodwill of the firm.

Question 18:
A business earned an average profit of 8,00,000 during the last few years. The normal
rate of profit 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 it is valued at 2.5 years’ purchase of
super profits.

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 Question 19:
Average net profit expected in future by XYZ firm is 36,000 per year. Average capital
employed in the business by the firm is 2,00,000. The normal rate of return from capital
invested in this class of business is 10%. Remuneration of the partners is estimated
to be 6,000 p.a. Calculate the value of goodwill on the basis of two years' purchase of
super profit.

Question 20:
A partnership firm earned net profits during the last three years ended 31st March, as
follows:
2022 − 17,000; 2023 − 20,000; 2024 − 23,000.
The capital investment in the firm throughout the above-mentioned period
has been 80,000. Having regard to the risk involved, 15% is considered to be a fair
return on the capital. Calculate value of goodwill on the basis of two years' purchase of
average super profit earned during the above-mentioned three years.

Question 21:
On 1st April 2021, an existing firm had assets of 75,000 including cash of 5,000. Its
creditors amounted to 5,000 on that date. The firm had a Reserve of 10,000 while
Partners' Capital Accounts showed a balance of 60,000. If Normal Rate of Return is 20%
and goodwill of the firm is valued at 24,000 at four years' purchase of super profit, find
average profit per year of the existing firm.

Question 22:
Average profit of a firm during the last few years is 2,00,000 and the normal rate of
return in a similar business is 10%. If the goodwill of the firm is 2,50,000 at 4 years'
purchase of super profit, find the capital employed by the firm.

Question 23:
Average profit earned by a firm is 1,00,000 which includes undervaluation of stock
of 40,000 on an average basis. The capital invested in the business is 6,30,000 and the
normal rate of return is 5%. Calculate goodwill of the firm on the basis of 5 times the
super profit.

Question 24:
Average profit earned by a firm is 7,50,000 which includes overvaluation of stock
of 30,000 on an average basis. The capital invested in the business is 42,00,000 and the
normal tare of return is 15%. Calculate goodwill of the firm on the basis of 3 time the
super profit.

Question 25:
Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st
April, 2021. They agreed to value goodwill at 3 years' purchase of Super Profit Method

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 for which they decided to average profit of last 5 years. The profits for the last 5
years were:
Year Ended Net Profit Adjustments
31st March, 2017 1,50,000
31st March, 2018 1,80,000
31st March, 2019 1,00,000 (Including abnormal loss of 1,00,000)
31st March, 2020 2,60,000 (Including abnormal gain (profit) of 40,000)
31st March, 2021 2,40,000
The firm has total assets of 20,00,000 and Outside Liabilities of 5,00,000 as on that
date. Normal Rate of Return in similar business is 10%.
Calculate value of goodwill.

Question 26:
From the following information, calculate value of goodwill of the firm by applying
Capitalization Method: Total Capital of the firm 16,00,000.
Normal rate of return 10%. Profit for the year 2,00,000.

Question 27:
A firm earns average profit of 3,00,000 during the last few years. The Normal Rate of
Return of the industry is 15%. The assets of the business were 17,00,000 and its
liabilities were 2,00,000.
Calculate the goodwill of the firm by Capitalization of Average Profit Method.

Question 28:
A and B were partners in a firm with capitals of 3,00,000 and 2,00,000 respectively. The
normal rate of return was 20% and the capitalised value of average profits was 7,50,000.
Calculate goodwill of the firm by capitalisation of average profits method

Question 29:
Puneet and Tarun are in restaurant business having credit balances in their fixed 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.

Question 30:
Form the following particulars, calculate value of goodwill of a firm by
applying Capitalisation of Average Profit Method:
(i) Profits of last five consecutive years ending 31st March are: 2021 −54,000; 2020
− 42,000; 2019 − 39,000; 2018 − 67,000 and 2017 − 59,000.
(ii) Capitalisation rate 20%.
(iii) Net assets of the firm 2,00,000.

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 Question 31:
A business has earned average profit of 4,00,000 during the last few years and the
normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method, and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profits.
Assets of the business were 40,00,000 and its external liabilities 7,20,000.

Question 32: A firm earns profit of 5,00,000. Normal Rate of Return in a similar type
of business is 10%. The value of total assets (excluding goodwill) and total outsiders'
liabilities as on the date of goodwill are 55,00,000 and 14,00,000 respectively.
Calculate value of goodwill according to Capitalisation of Super Profit Method as well as
Capitalisation of Average Profit Method.

Question 33:
On 1st April, 2018, a firm had assets of 1,00,000 excluding stock of 20,000. The current
liabilities were 10,000 and the balance constituted Partners' Capital Accounts. If the
normal rate of return is 8%, the Goodwill of the firm is valued of 60,000 at four years'
purchase of super profit, find the actual profits of the firm.

Question 34:
Average profit of a firm during the last few years is 1,50,000. In similar business, the
normal rate of return is 10% of the capital employed. Calculate the value of goodwill by
capitalisation of super profit method if super profits of the firm are 50,000.

Question 35:
Raja Brothers earn an average profit of 30,000 with a capital of 2,00,000. The normal
rate of return in the business is 10%. Using capitalisation of super profit method,
workout the value of the goodwill of the firm.

Question 36:
Rajan and Rajani are partners in a firm. Their capitals were Rajan 3,00,000;
Rajani 2,00,000. During the year 31st March 2021, the firm earned a profit of 1,50,000.
Calculate the value of goodwill of the firm by capitalisation of super profit assuming that
the normal rate of return is 20%.

Question 37:
Average profit of GS & Co. is 50,000 per year. Average capital employed in the
business is 3,00,000. If the normal rate of return on capital employed is 10%, calculate
goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.

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 Question 38:
A business has earned average profit of 8,00,000 during the last few years and the
normal rate of return in similar business is 10%. Find value of goodwill by:
(i) Capitalisation of Super Profit Method; and
(ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profit.
Assets of the business were 80,00,000 and its external liabilities 14,40,000.

Question 39:
From the following information, calculate 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.
(iv) On the basis of Capitalisation of Average profit.
Information:
(a) Average Capital Employed is 6,00,000.
(b) Net Profit/Loss of the firm for the last three years ended are:
31st March, 2021 − 2,00,000, 31st March, 2020 − 1,80,000, and 31st March, 2019
− 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 charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments)
is 7,00,000 whereas Partners' Capital is 6,00,000 and Outside Liabilities 1,00,000.

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