2. Geeta Handa
PGT Accountancy
• 20 years experience of teaching
accountancy.
• 14 years experience of checking
accountancy papers of CBSE
• Worked as examiner for conducting
practical exam of accountancy.
geet7handa@gmail.com Geeta Handa
3. Q12 Geet and Meet are partners in a firm. They admit Jeet into partnership for equal share. It
was agreed that goodwill will be valued at three years’ purchase of average profit of last five
years. Profits for the last five years were :
Year Ended 31st March,2016 31st March,2017 31st March ,2018 31st March 2019 31st March 2020
Profit ( Rs.) 90,000 (Loss) 1,60,000 1,50,000 65,000 1,77,000
Books of Account of the firm revealed that :
(i) The firm had gain (profit) of Rs.50,000 from sale of machinery sold in the year ended 31st March,
2016 The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of Rs.20,000 incurred in the year ended 31st March, 2017 because of a
machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2018 amounting to Rs.1,00,000
was debited to Repairs Account. Depreciation is charged @20% p.a. on Written Down Value
Method.
Calculate the value of goodwill.
Geeta Handa
4. Goodwill : Average Profit Method
Q13 Geet and Meet are partners in a firm. They admit Jeet into partnership for equal share. It
was agreed that goodwill will be valued at three years’ purchase of average profit of last five
years. Profits for the last five years were :Year Ended 31st March,2015 31st March,2016 31st March ,2017 31st March 2018 31st March 2019
Profit ( Rs.) 90,000 (Loss) 1,60,000 1,50,000 65,000 1,77,000
Books of Account of the firm revealed that :
(i) The firm had gain (profit) of Rs.50,000 from sale of machinery sold in the year ended 31st March,
2016 The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of Rs.20,000 incurred in the year ended 31st March, 2017 because of a
machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2017 amounting to Rs.1,00,000
was debited to Repairs Account. Depreciation is charged @20% p.a. on Written Down Value
Method.
Calculate the value of goodwill.
Geeta Handa
5. Geeta Handa
Formula for Calculation of Goodwill by Average Profit Method
• Goodwill = Average Profits X No. of Years’ Purchased
• Average Profit =
Total Adjusted Profits
No. of Years
6. Formula for Adjusted Profits
Adjusted Profits / Normal Business Profits = Profits of the Year
− Abnormal Gain(non operating )
+ Abnormal Loss
Geeta Handa
7. Formula for Adjusted Profits
Adjusted Profits = Profits of the Year
− Abnormal Gain ( Gain on sale of Machinery)
Geeta Handa
8. Formula for Adjusted Profits
Adjusted Profits = Profits of the Year
− Abnormal Gain
+ Abnormal Losses (Incurred in the year )
Geeta Handa
9. Formula for Adjusted Profits
Adjusted Profits = Profits of the Year
− Abnormal Gain
+ Abnormal Losses
+ Capital Expenditure Charged as Revenue Expenditure
(Machinery Purchased wrongly debited to Repairs Account)
Geeta Handa
10. Formula for Adjusted Profits ( Normal Business Profit)
Adjusted Profits = Profits of the Year
− Abnormal Gain
+ Abnormal Losses
+ Capital Expenditure Charged as Revenue Expenditure
− Depreciation ( on machinery purchased wrongly debited
to Repairs Account)
Geeta Handa
11. Calculation of Adjusted Profit / Normal Business Profit
Years 31
March
Profits
(Rs.)
2016 (90,000)
2017 1,60,000
2018 1,50,000
2019 65,000
2020 1,77,000
Geeta Handa
12. Calculation of Adjusted Profit / Normal Business Profit
Years 31
March
Profits
(Rs.)
Less Abnormal
Gain (Profit)
2016 (90,000)
2017 1,60,000 ─ 50,000
2018 1,50,000
2019 65,000
2020 1,77,000
Geeta Handa
13. Calculation of Adjusted Profit / Normal Business Profit
Years 31
March
Profits
(Rs.)
Less Abnormal
Gain (Profit)
Add Abnormal
Loss
2016 (90,000)
2017 1,60,000 ─ 50,000
2018 1,50,000 + 20,000
2019 65,000
2020 1,77,000
Geeta Handa
14. Calculation of Adjusted Profit / Normal Business Profit
Years 31
March
Profits
(Rs.)
Less Abnormal
Gain (Profit)
Add Abnormal
Loss
Add Capital
Expenditure
2016 (90,000)
2017 1,60,000 ─ 50,000
2018 1,50,000 + 20,000
2019 65,000 +1,00,000
2020 1,77,000
Geeta Handa
15. Geeta Handa
Working Note :
Depreciation on Machinery Purchased On 1st July 2018 @20% on Written Down Value Method
• From 1st July 2018 to 31st March 2019 (for 9 months) => 1,00,000 X
20
100
X
9
12
= Rs.15,000
( On Cost Rs.100,000)
• From 1st April 2019 to 31st March 2020 (for 1 Year) => 85,000 X
20
100
= Rs.17,000
( On Book Value = 1,00,000 ─ 15,000 = 85,000)
16. Calculation of Adjusted Profit / Normal Business Profit
Years 31
March
Profits
(Rs.)
Less Abnormal
Gain (Profit)
Add Abnormal
Loss
Add Capital
Expenditure
Less
Depreciation
2016 (90,000)
2017 1,60,000 ─ 50,000
2018 1,50,000 + 20,000
2019 65,000 +1,00,000 ─15,000
2020 1,77,000 ─ 17,000
Geeta Handa
17. Calculation of Adjusted Profit / Normal Business Profit
Years 31
March
Profits
(Rs.)
(a)
Less Abnormal
Gain (Profit)
(b)
Add Abnormal
Loss
(c)
Add Capital
Expenditure
(d)
Less
Depreciation
(e)
Adjusted Profit
(Rs.)
(a –b + c + d – e)
2016 (90,000) (90,000)
2017 1,60,000 ─ 50,000 1,10,000
2018 1,50,000 + 20,000 1,70,000
2019 65,000 +1,00,000 ─ 15,000 1,50,000
2020 1,77,000 ─17,000 1,60,000
Geeta Handa
18. Calculation of Adjusted Profit / Normal Business Profit
Years 31
March
Profits
(Rs.)
(a)
Less Abnormal
Gain (Profit)
(b)
Add Abnormal
Loss
(c)
Add Capital
Expenditure
(d)
Less
Depreciation
(e)
Adjusted Profit
(Rs.)
(a –b + c + d – e)
2016 (90,000) ─ 90,000
2017 1,60,000 ─ 50,000 + 1,10,000
2018 1,50,000 + 20,000 + 1,70,000
2019 65,000 +1,00,000 ─ 15,000 + 1,50,000
2020 1,77,000 ─17,000 + 1,60,000
Total Adjusted Profits 5,00,000
Geeta Handa
19. Geeta Handa
Average Profit =
Total Adjusted Profits
No. of Years
=
5,00,000
5
= Rs.1,00,000
Goodwill = Average Profits X No. of Years’ Purchased
= 1,00,000 X 3 = Rs.3,00,000
Answer : Goodwill = Rs. 3,00,00
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Geeta Handa
