Chapter-2 VALUATION OF GOODWILL

  1. Define Goodwill [1]
  2. List any four factors affecting goodwill. [1]
  3. How does the factor ‘Quality of Products’ affect the goodwill of a firm? [1]
  4. How does the factor ‘Location’ affect the goodwill of a firm? [1]
  5. How does the factor ‘Efficiency of Management’ affect the goodwill of a firm? [1]
  6. How does the market situation affect the value of goodwill of a firm? [1]
  7. How does the nature of business affect the value of goodwill of a firm? [1]
  8. Describe the need for valuation of goodwill. [3]
  9. The profit for the last five years of a firm were as follows:

Year 2010 Rs.4,00,000; Year 2011 Rs.3,98,000; Year 2012 Rs.4,50,000;

Year 2013 Rs.4,45,000 and Year 2017 Rs.5,00,000.

  1. Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits. (3)
  2. Compute the value of goodwill on the basis of four years purchases of the average profits based on the last five years.

Year                Amount

2010               90,000

2011               (40,000) Loss

2012               80,000

2013               70,000

2017               60,000                                                                                                (3)

 

  1. The following were the profits of a firm for the last three years.

Years ending                          Profit

2012                                       4,00,000 (Including an abnormal gain of Rs.50,000)

2013                                       5,00,000(after charging an abnormal lossofRs.1,00,000)

2017                                        4,50,000(excluding Rs.50,000 payable on the insurance          of plant and achinery)

 

  1. The following were the profit of a business firm:

2012   Rs.60,000 (including an abnormal gain Rs.15,000)

2013   Rs.1,20,000 (after charging an abnormal loss Rs.30,000)

2017   Rs.1,26,000 (excluding Rs.6,000 as insurance premium of property now to be insured) Calculate firm’s goodwill at two year’s purchase of the average profit of the last three years.

 

  1. What is meant by Super Profit Method? [1]
  2. What are the four steps involved in calculating goodwill through Super Profit? [1]
  3. If the amount of super profit is negative, what does it indicate? [1]
  4. Differentiate between Average Profit Method and Super Profit Method [3]
  5. The books of a business firm showed that the capital employed on 31 December 2013 was Rs.10,00,000 and the profits for the last five years were:

2010               Rs.80,000

2011               Rs.1,00,000

2012               Rs.1,10,000

2013               Rs.1,40,000

2017               Rs.1,70,000

 

  1. 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%. [3]

 

  1. The books of a business firm showed that the capital employed on 31 December 2013 was Rs.20,00,000 and the profits for the last five years were:

2010               Rs.2,60,000

2011               Rs.2,80,000

2012               Rs.2,70,000

2013               Rs.2,50,000

2017               Rs.2,10,000

  1. 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%. [3]

 

  1. The Capital employed in a business is Rs.50,000. The average net profits of business is Rs.9,000. The Normal Rate of return on capital employed is 10%. The remuneration of the partners is estimated to be Rs.1,500 per annum. Calculate the value of goodwill on the basis of 4 years purchase of super profits. 8. A and B are partners in a firm sharing profits in the ratio of 2 : 1. Their capitals are Rs.2,00,000 and Rs.1,50,000. Normal rate or return on the capital employed is 10%. Both partners will get annual salary of Rs.25,000 each. Profits of firm are :
23.  Year 24.  Profit/Loss
25.  2008

 

26.  2009

 

27.  2010

28.  75,000 Profit

 

29.  90,000 Profit

 

30.  1,20,000 Profit

 

Calculate the value of goodwill on the basis of 2 years purchase of super profits.

 

  1. Give the formula of Goodwill by ‘Capitalisation of Average Profits’ Method. [1]
  2. Give the formula for calculation of Goodwill by ‘Capitalisation of Super Profit’ Method. [1]
  3. Why is Goodwill considered as an intangible asset but not a Fictitious Asset? [1]

 

  1. A partnership firm earned net profits during the last three years as follows:
35.  Years 36.  Profit
37.  2007-08

38.  2008-09

39.  2009-10

40.  38,000

41.  44,000

42.  50,000

  1. The Capital Employed in the firm throughout the above mentioned period has been Rs.80,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of all the partners during this period is estimated to be Rs.20,000 per annum.

 

  1. Calculate the value of goodwill on the basis of (i) Two years purchase of super profits earned on average basis during the above mentioned three years and (ii) Capitalization method.
  2. A Business earned average profits of Rs.5,00,000 during the last few years and the normal rate of return in similar business is 10%. Find out the value of Goodwill by (i) Capitalization of Super Profit method and (ii) Super Profit method, if the goodwill is valued at 3 years purchase of super profit. The assets of the business were Rs.50,00,000 and its external liabilities Rs.9,00,000. [4]

 

  1. Vivek and Kumar are partners in a firm. Their capitals were: Vivek  6,00,000 and Kumar Rs.4,00,000. During the year 2017 the firm earned a profit of Rs.3,00,000. Calculate the value of goodwill of the firm assuming that the normal rate of return is 20%. [4]

 

  1. A Business has earned average profits of Rs.2,00,000 during the last few years and the normal rate of return in a similar type of business is 10%. Ascertain the value of Goodwill by Capitalisation method. Given that the value of Net Assets of the firm is Rs.16,40,000. [4]

 

  1. Larson, William and Harry are partners in a firm with the capitals of Rs.1,87,500 , Rs.1,50,000 , Rs.1,12,500. Average profit of the business for last few years is Rs.72,000. Normal rate of return in a similar business is 10%. Calculate the value of goodwill by capitalization of super profit.

 

Author: Ravi Kashyap

Commerce Expert

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