Valuation of Goodwill 📊💰
A comprehensive set of practice problems to master the calculation of goodwill for partnership firms and businesses.
Key Formulas 🧮
Goodwill is typically valued using the Average Profit or Super Profit method. Here are the essential formulas rendered beautifully with MathJax.
Average Profit Method
This method values goodwill based on the average profits of the past few years.
$$ \text{Average Profit} = \frac{\text{Total Profit of Given Years}}{\text{Number of Years}} $$ $$ \text{Goodwill} = \text{Average Profit} \times \text{Number of Years' Purchase} $$Super Profit Method
This method considers the excess profit earned by the firm over the normal profit expected in the industry.
$$ \text{Normal Profit} = \text{Capital Employed} \times \frac{\text{Normal Rate of Return}}{100} $$ $$ \text{Super Profit} = \text{Actual/Average Profit} - \text{Normal Profit} $$ $$ \text{Goodwill} = \text{Super Profit} \times \text{Number of Years' Purchase} $$ $$ \text{Capital Employed} = \text{Assets} - \text{External Liabilities} $$Practice Problems ✍️
The profits of the firm for the last five years are 2002: Rs. 20,000; 2003: Rs. 16,000; 2004: Rs. 24,000; 2005: Rs. 8,000; 2006: Rs. 12,000. Calculate the goodwill of the firm (assume 1 year's purchase as it is not specified).
✅ Answer: Rs. 16,000
Mona, Reena and Sona have been carrying on a partnership business and goodwill of their firm is to be valued at three years' purchase of the average profit for the last five years. The profits and losses for the last five years have been: 1st Year: Rs. 16,000, 2nd Year: Rs. 15,000, 3rd Year: Rs. 8,000 (Loss), 4th Year: Rs. 7,000, 5th Year: Rs. 10,000.
✅ Answer: Rs. 24,000
Calculate the goodwill from the following information. Goodwill is valued at three years' purchase of the average profit of the last six years.
Year Status 1st Year Rs. 40,000 (Profit) 2nd Year Rs. 60,000 (Profit) 3rd Year Rs. 10,000 (Loss) 4th Year Rs. 50,000 (Profit) 5th Year Rs. 30,000 (Loss) 6th Year Rs. 80,000 (Profit) ✅ Answer: Rs. 95,000
Calculate the value of goodwill according to the average profit method. Goodwill is valued at three years' purchase of the last four years' average profit.
Year Status 1st Year Rs. 10,000 (Profit) 2nd Year Rs. 12,000 (Profit) 3rd Year Rs. 4,000 (Loss) 4th Year Rs. 18,000 (Profit) ✅ Answer: Rs. 27,000
The profit of a firm for the four years from 1991 to 1994 were as follows. Calculate the goodwill of the firm at 2 years' purchase of the average profit for the last three years (1992, 1993, 1994).
Year Profit 1991 Rs. 40,000 1992 Rs. 45,000 1993 Rs. 55,000 1994 Rs. 53,000 ✅ Answer: Rs. 1,02,000
Mr. X, a businessperson, has earned the following profits in the last five years. Value the goodwill of Mr. X on the basis of three years' purchase of the average profit of the past five years.
Year Profit 1995 Rs. 1,05,800 1994 Rs. 1,02,600 1993 Rs. 98,400 1992 Rs. 96,800 1991 Rs. 95,500 ✅ Answer: Rs. 2,99,460
Goodwill is valued at three years' purchase of the last five years' average profit. The profits (P) and losses (L) for the last five years are:
Year Status 1st Year Rs. 4,800 (P) 2nd Year Rs. 7,200 (L) 3rd Year Rs. 10,000 (L) 4th Year Rs. 3,000 (P) 5th Year Rs. 5,000 (L) Note: Since the company’s average profit is negative, the firm’s goodwill is zero.
✅ Answer: 0
Compute the goodwill in the following case. Goodwill is valued at three years' purchase of the average profit of the last five years.
Year Profit 1st Year Rs. 5,800 2nd Year Rs. 7,400 3rd Year Rs. 20,000 4th Year Rs. 3,500 5th Year Rs. 7,300 ✅ Answer: Rs. 26,400
Sales of a trader for the 3 years ended 30th June are as follows. The profit margin for these years was 10%, 12%, and 12% respectively. For selling the business, goodwill is to be valued at 2 years' purchase of the average profit of the last 3 years. Find the value of goodwill.
Year Ended June 30th Sales Profit Margin 1995 Rs. 5,50,000 10% 1994 Rs. 5,46,000 12% 1993 Rs. 5,25,000 12% ✅ Answer: Rs. 1,22,680
From the following particulars, value goodwill at 2 years' purchase of the last 5 years' average profit.
Year Ended Turnover Net Profit % on Turnover 31-12-1990 Rs. 5,15,000 5% 31-12-1991 Rs. 5,45,600 6% 31-12-1992 Rs. 5,35,800 7% 31-12-1993 Rs. 5,40,900 7.5% 31-12-1994 Rs. 5,60,800 7% ✅ Answer: Rs. 70,326
A firm with an average capital employed of Rs. 1,60,000 is expected to earn Rs. 40,000 per annum in the future. Calculate goodwill at three times the super profit, taking the normal rate of return as 15%.
✅ Answer: Rs. 48,000
Capital employed on 31st December 1990 was Rs. 1,00,000. Normal rate of return is 15%. Goodwill is valued at 3 years' purchase of the super profits. The profits for the last 5 years were:
Year Profit 1986 Rs. 30,000 1987 Rs. 40,000 1988 Rs. 50,000 1989 Rs. 40,000 1990 Rs. 60,000 ✅ Answer: Rs. 87,000
The books of a business showed that the capital employed on 31st December 1992 was Rs. 1,00,000. Profits for the last five years were: 1988: Rs. 60,000, 1989: Rs. 55,000, 1990: Rs. 75,000, 1991: Rs. 85,000 & 1992: Rs. 65,000. Goodwill is valued at 2 years' purchase of the Super profit. The Normal Rate of Return (NRR) is 10%.
✅ Answer: Rs. 1,16,000
M/s XYZ partnership firm earned net profits of Rs. 7,000, Rs. 13,000, Rs. 12,000, and Rs. 8,000 during the last four years. The capital investment was Rs. 50,000. NRR is 15%. The remuneration of the partners during the period is Rs. 500 p.a. Goodwill is valued at 2 years' purchase of the average super profit.
✅ Answer: Rs. 4,000
M/s Vijay trading company earned net profit during the last four years as follows. The capital investment is Rs. 1,50,000, NRR is 20%, and partners' remuneration is Rs. 500 p.m. (Rs. 6,000 p.a.). Goodwill is valued at 2 years' purchase of the average super profit.
Year Profit 1st Year Rs. 57,000 2nd Year Rs. 44,000 3rd Year Rs. 61,000 4th Year Rs. 58,000 ✅ Answer: Rs. 38,000
The average net profit expected in the business by ABC firm is Rs. 36,000 per year. The average capital employed is Rs. 2,00,000. The rate of interest expected from capital is 10%. The remuneration of the partners is estimated to be Rs. 6,000 p.a. Calculate the value of goodwill based on 2 years' purchase of super profit.
✅ Answer: Rs. 20,000
M/s Rajesh Trading company earned net profits of Rs. 15,000, Rs. 28,000, Rs. 30,000 & Rs. 40,000 over the last four years. The capital investment is Rs. 1,00,000, NRR is 15%, and partners' remuneration is Rs. 1,000 p.a. Goodwill is valued at 2 years' purchase of the average super profit.
✅ Answer: Rs. 24,500
The present average net profit of the Braful and Shobha partnership firm, before deducting partner’s remuneration, is Rs. 27,000 p.a. The capital employed by Braful is Rs. 1,00,000 & by Shobha is Rs. 50,000. The expected profit from total capital is 10% p.a. The total remuneration is estimated to be Rs. 6,000 per annum. Find the value of goodwill on the basis of 2 years' purchase of super profit.
✅ Answer: Rs. 12,000
From the Balance Sheet of Kantilal & Chandrakant, ascertain the value of goodwill at 2 years' purchase of the super profit of the last 3 years, with NRR at 10%. The net profits for the last three years were Rs. 15,000, Rs. 25,000, and Rs. 26,000.
Balance Sheet as on 31st March, 1995 Liabilities Amount (Rs) Assets Amount (Rs) Kantilal's Capital 90,000 Machinery 50,000 Chandrakant's Capital 70,000 Building 41,000 Reserve Fund 44,000 Investments 30,000 Creditors 38,000 Stock 20,000 Debtor 66,000 Bank 30,000 Profit/loss A/c (Dr.) 5,000 Total 2,42,000 Total 2,42,000 ✅ Answer: Rs. 4,200
From the Balance Sheet of M/s Anna and Chunna, calculate goodwill at 2 years' purchase of the average super profit. NRR is 10%. Net profits for the past 3 years are: 1st year Rs. 43,350, 2nd year Rs. 36,870, 3rd year Rs. 32,280.
Balance Sheet as on 31st March, 1995 Liabilities Amount (Rs) Assets Amount (Rs) Anna's Capital 1,64,000 Machinery 10,000 Chunna's Capital 40,000 Building 26,000 Creditors 35,000 Plant 56,000 Profit/Loss A/c (Cr.) 3,040 Stock 56,000 Debtor 19,040 Bank 75,000 Total 2,42,040 Total 2,42,040 ✅ Answer: Rs. 33,592
The average annual profit earned by a firm is Rs. 30,000, which includes Rs. 2,000 p.a. from non-trading investments. This average is expected to continue, except for two changes: (a) Rent of Rs. 500 per month will no longer be paid. (b) Salaries of Rs. 7,000 p.a. will increase by 20%. Calculate goodwill at 3 times the Average Expected Profit.
✅ Answer: Rs. 97,800
The firm of Mr. X and Mr. Y earned an average annual profit of Rs. 60,000, including Rs. 5,000 p.a. interest on non-trading investments. The profit is expected to be maintained except for: (1) Rent of Rs. 600 p.a. will no longer be paid. (2) Mr. X will replace the manager (salary Rs. 6,000 p.a.), and his services are worth Rs. 1,000 p.a. Calculate Goodwill at 2 years' purchase of average profit.
✅ Answer: Rs. 1,21,200
Priti and Pritam are partners (ratio 3:2). They admit Prasad for a 1/6th share. Goodwill is to be valued at 3 years' purchase of the last 5 years' average profit.
Year 1990–91 1991–92 1992–93 1993–94 1994–95 Profit/Loss (Rs.) 60,000 62,500 (45,000) 42,500 80,000 ✅ Answer: Rs. 2,01,000 (Note: The provided answer of 27,000 seems incorrect based on the data. The calculated answer is shown).
Calculate goodwill at 2 years' purchase of the average profit from Raghunath’s revenue statements for the past 3 years.
Raghunath's Revenue Statement Particulars 1995 (Rs) 1996 (Rs) 1997 (Rs) Sales 50,000 70,000 100,000 Less: Cost of Sales (30,000) (50,000) (50,000) Gross Profit 20,000 20,000 50,000 Less: Expenses (24,000) (10,000) (20,000) Net Profit/(Loss) (4,000) 10,000 30,000 ✅ Answer: Rs. 24,000
Calculate goodwill at 2 years' purchase of the average profit from Raj Kumar's revenue statements for the past 3 years.
Raj Kumar's Revenue Statement Particulars 1995 (Rs) 1996 (Rs) 1997 (Rs) Sales 50,000 70,000 100,000 Less: Cost of Sales (10,000) (50,000) (50,000) Gross Profit 40,000 20,000 50,000 Less: Expenses (22,000) (10,000) (20,000) Net Profit 18,000 10,000 30,000 ✅ Answer: Rs. 38,667 (Note: Provided answer of 41,334 seems to use different figures. Calculation based on table is (18k+10k+30k)/3 * 2).
Home Work Section 🏡📝
Mahipati and Ganpati are partners (ratio 4:3). They admit Shripati for a 1/8 share. Goodwill is to be valued at 2 years' purchase of the last 5 years' average profit. Calculate the goodwill.
Year Profit (Rs.) 1991–92 75,000 1992–93 1,00,000 1993–94 1,25,000 1994–95 85,000 1995–96 1,15,000 ✅ Answer: Rs. 2,00,000
Jaya and Maya are in partnership. Goodwill is to be valued at 3.5 years' purchase of the average profit of the last 6 years. Calculate the value of Goodwill.
Year Status (Rs.) 2001–02 1,20,000 (Loss) 2002–03 2,60,000 (Profit) 2003–04 1,80,000 (Loss) 2004–05 2,90,000 (Profit) 2005–06 3,20,000 (Profit) 2006–07 2,10,000 (Profit) Note: As per the instructions, the last 6 years from the list are considered, ignoring the 2000-01 profit mentioned in the source file.
✅ Answer: Rs. 4,55,000
Vijay and Azim are in partnership. Goodwill is to be valued at 3 years' purchase of the average profits of the last 5 years. Calculate the goodwill.
Year Status (Rs.) 1996-97 32,000 (Profit) 1997-98 30,000 (Profit) 1998-99 16,000 (Loss) 1999-2000 14,000 (Profit) 2000-01 20,000 (Profit) ✅ Answer: Rs. 48,000
From the Balance Sheet of Ashok and Nayan, calculate the value of goodwill at 2.5 years’ purchase of the super profit. NRR is 13%. Trading results for the last four years were 2003–04: Rs. 65,000 (Profit), 2004–05: Rs. 5,000 (Loss), 2005–06: Rs. 78,000 (Profit), 2006–07: Rs. 92,000 (Profit).
Balance Sheet as on 31st March, 2007 Liabilities Amount (Rs) Assets Amount (Rs) Ashok's Capital 1,00,000 Plant and Machinery 1,78,000 Nayan's Capital 1,20,000 Furniture 62,000 General Reserve 78,000 Stock 48,000 Profit & Loss A/c 56,000 Debtors 40,000 Sundry Creditors 36,000 Bank 35,000 Prepaid Expenses 27,000 Total 3,90,000 Total 3,90,000 ✅ Answer: Rs. 24,975
Calculate goodwill at three years' purchase of super profit from the following: (i) Total capital employed: Rs. 4,00,000. (ii) Net profits for the past three years: Rs. 53,800, Rs. 45,350, Rs. 56,250. (iii) NRR: 10%.
✅ Answer: Rs. 35,400
From Mr. Atul's Balance Sheet, calculate goodwill at two times the super profit. NRR is 15%. The net profits for the last three years were Rs. 19,500; Rs. 22,500; Rs. 30,000.
Balance Sheet as on 31st March, 1993 Liabilities Amount (Rs) Assets Amount (Rs) Capital 77,500 Fixed Assets 85,000 General Reserve 22,500 Current Assets 50,000 Creditors 40,000 Prepaid Advertisement 10,000 Bills Payable 5,000 Total 1,45,000 Total 1,45,000 ✅ Answer: Rs. 21,000
Important Points to Remember 📌
- Terms like "Years' Purchase," "Times," "Thrice," or "Twice" refer to the number of years' purchase used in goodwill calculation.
- If the number of years' purchase is not given, you should generally assume it is 1 year's purchase.
- If a firm consistently incurs losses or if the average profit/super profit is negative, the value of goodwill is considered Zero (0).
- Capital Employed is calculated as: Partners’ Capital + Reserves + Accumulated Profits – Fictitious Assets (like unadjusted losses or expenses not written off). Alternatively, it is Total Assets - External Liabilities.