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Problems based oiilPast Year's Profits -

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I. The profits';9f a lim,ited company for past 6 years are as f~.i{ows -

. . ~

.. ~

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... ,.
2001 30,000 2004 :i
""
I ,~• • 35,000 /J
\.

..
, ;
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·"
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2002 35,000 2005 : I: 45,000 ;

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2003 25,000 2006 •· · 40,000 ..
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Calculate t~~• value of Goodwill of the company if it is based

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on
•
3 years
.
purcha~e
••
of, .
the average-profits of the 6 years. . . : ~.
tr: . · · . .
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2. The results of a limited company are given below for 5 y¥·t rs -

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2001 .. 28,000 -;:.:,\
r~ . _.. _;j
~\ .

2002 35,000 r
·;:};
i- i ,;1!;
2003 15,000( loss)
¾-·-
ll:.··
•'

2004 12,000( loss) i;\11

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2005 27,000 ,,..,

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~

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Calculate the value'of goodwill of the company ifit is based on 4 years ofth~ past,5 years
profits. · t! };, · • : ·
( . . i!,,: : .

3. From the following information ascertain the value of goJ~will which is to be

calculated ~~ the basis of 3 years purchases of: / ·. ' • · ·
it
I. Aver.age Annual Profits
II. Weighted Average Annual Profits
..l, ..
..
Year Annual Profits W~\ghts
,t
2018 -~-' 12,000 1 l !>'-:, '
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.,
2019 ii.
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36,000 2 ; -~-;
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2020 ::
13,000 3 At
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2021 (11,000) 4 ,:,1'

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4. The followi:tfo
, details relates to Sony & Co .
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IYear I Annual .Profits I w r,~~hts

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1
2017 ~· ·6,000 1 £1
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:
2018 .. :21,00 0 2 ,,
! ,',..
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2019
,
' 28,000 3 ,,
:,
2020 '.I- ,,,: 31,000 4
,.. ..
2021
·,
· 35,000 5
..
'·
a . i '
,:.11.

De~!~rrnme the value of Goodwill based on 2 times of

1. Average Annu,al. Profits
. , .·.: .
· :. ·. ii.·.' _W~ighted Average Annual Profits

· _· : '. : : '. .. Capitalifaiion-M etliod.:. Si~ple Averag e Profit Method

. .. : .

_Steps t~';,f~llo_w~ ·...·

C_a lculate the ·a~e~agelp;ofi ts

/·
. Ca:Iculate the total ·valui~ of the business i.e Average Profits /NRR
c;. .Calculate ·goodwill where-
. Goodwill= (Total vaIJt of Business-Net worth) X No. of years of purchase
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5. · The net profits of a con:ipariy for past 5 years are as follows:_
, :;:
2003 ·!:i 40,000 :
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2004 < 45,000 ,
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'..... 47,000,
2005 1:-
Jt·. ,.~-
.,

2006
: jl . 40,000
'1, '
:
.
::·, 48,000:
·2007 ...
\

The ·capital employed in the ~~siness is Rs. 4, 00,000 on which a reasona

ble1rate of return of
10% _is expectea.' Calculate tii-~. ivalue of goodwill on the basis of capitali
zatiq.h of simple
I

average profits method, if it is'' J:,ased on 3 years purchase.

.

When there are losses

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6. The net result of a cowpa ny for past 6 years are as follows -

'·,)

80,00Q 2005 1,05,000

2002 ~ l;
·1 t :,
:
85,0Qb,; 2006 1, 1.5;000
2003·
. ·1 . 1;;- ·.
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2004 (30,000) 2007 1;2s,oo;o

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The capital emplo~ed into the business is Rs. 2,50,000 on which.'~~easonable rlte of return is
expected @12%. ~r rtfllC"late
~ .
the value o f goq dw1·11 o f the compan.Y,;:'qY
, (.\' cap1taltzation
· ' · ; of simple
· ~
average profit metll.,o d 1f it is based on 4 years purchase. \,· . . ,;;·_
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7. The profits/fosses of a company for the past 5 years are J } ollows - : '}
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2003, . 1,00,000 , H
' 11 .
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2004 1,20,000
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200~ . •'
(40,000) I·
) ;)

ki; .
200:Q, (50,000) f' ..
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2001 1,20,000 ?~;

The net worth of th~ business is Rs. 80,000 on which a reasonabl_~ rate ~f 14% is ~xp·ected. .·:
Calculate the value~of goodwill of the company by capitalization;pf Simple avera_ge profit ':,
method if it is base~ on 3 years purchase. · ':i: · ]:.
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Capitalir.atio11 Meiliod-Adiusted Average Profit Method
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Steps-
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a. Find out the,:lmown values /given values in the problem · di' .
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b. Calculate 11'\~ adjusted average profits . ·.;y
c. Calculate tl1e total value of business, where - :~
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Total value of b'usiness,..; Adjusted Average profits :• i·: . .·

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. . ..
·
NRR i'
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d. Calculate g~~dwill , where - ..{
Goodwill =)~Total value of Business- Networth) X No. ':':~
. ·.. ::: . .
:bf years of Purchase .;}
1·"· . . .. :,; . . .. •. .. . ,• : .~ . . -.:. .
8. Y Co. Ltd i~~desirous of selling its business to another COlV~any .It·h~s· ea'rne~ ari .' ·.
average profi t of Rs. 1,60,000 p.a and the same amount oft~rofit is likely fo b~ eame~
' . ..':::' . r
in the futur~,:also except that - : : j' j
a. Directorfs fees ofRs.12, 000/- p.a will ~ot be payable ~Y
the purcpasi.ng compaM .
to the di~ectors in future because the existing board o~5qirectors· can manage the '1[
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new bus.iness themselves. \i

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purchasing co~pany and is also
b. · Rent of Rs. 28,00,'0 p.a will not be payable by the
ing; .
not to be incurrei :ip the future as it has its own build
was estimateq to be Rs. 18,
· c. The net assets of;,t~e company other than goodwill
be 10% p.a'; .
'! . ·. 00,000 /- and N~R, in similar business is assumed to
purchas~.o f the adjusted
Calcufate the val~~ of goodwill if it is based on 3 years
. average profits of.the company.
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to S Company at C/ipitalized value.
· 9. 'A' company-Ltd is i~terested to sell its business
the 'profits Me likely to be
Average past piofit of the company is Rs. 2,20,000 and .:
earned in a simrlar ti-~'n.d in future also except-
be payable by S Co. ltd because
a. 3 directors salaries of'.Rs .20, 000 each p.a will not ',
they thenise_lves can manage the business.
S Ltd as it has its o~n building.
b. A rent of Rs.5, 000/- p.m is not to be payable by
will was estimate~ to be Rs. 2 I,
c. . The net valuation of' f,>-' company other than good
00,000 and the NRR is' 8% p.a .
'
.
on 2 years purchase):m the adjusted
Calculate the goodwill of AJtd Company if it is based
av~rage profits of the comp~;ty.
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Supe r Profits Meth od

Steps-
. a. Calcula(e the adjusted average Profits
b. Calculate the average ~apital employed , where ,
nt year's profit ·
Averag~ Capital Emp~pyed.= Net Worth -1/2 of Curre
c. Calculate Norma:! proJits , where ,
Normal Profits= Ave~~ge Capital Employed X NRR
d. Calculate the super pi(i)fits ; where,
ts
Super Profits= Adjus~ed Average Profits - Nonna! Profi
: e. Calculate Goodwill , ·where ,
Goodwilf,,;, Super Profi ts X Number of years of purchase
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to Mr. Vishwanath, calculate the

1O. Fro~ the following p~)'.rticulars relating to relating
super profits by taking into
value of g6.odwill on tpe basis of 2 years purchase of
·
considerat~on the avet1ge profits of the past 5 years.
I.

Given data Rs.

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Fixed ~~sets 6,50,000
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Debtor~ 80,000 "

Stock .· .. 65,000

Other G\lrrent Assets 35,000 I

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Creditors 20,000
I

Other Current Liabilities 1,00,000 ~

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The NRR in simil.d ::.

indu tr· · 120/ T he profits for the last 5 y~ars
-'.( s tes ts ;,o. are as follows - .
t;
:Year
n'
Profit 1/i'
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r/><1
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:It' 1,60,000
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1,55,00Q
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.3
,:q 1,40,000

-~
~. 1,50,000

$i 1,60,000 (CY)

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I

super profits ,
11. From the fo.(Iow ing infonn ation calculate the value of god~will under· · ·'
method . :., ''.
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: 6,00,00 0
Averag e Cifpital Emplo yed I•

5(),000 p.a
Net Profits ;qfthe compa ny for last 3 years before paying .,.
manager's remuneration /

I 1,60,000
'!

2 j'I,80,000

3 · ),70,000 \
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at'a revised value ·
The NRR in similar industr ies is 12%. The total assets of the firm
. Calcul ate th~..,-
amoun ted to·, Rs. 7, 50,000 and total liabilities amoun ted td·Rs. 40,000 \

·
value of goociw
II
ill at 3 years purcha se.
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for the pas~:5
12. The net pro*s of the business concern (after providing taxation @,30%)
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years are as.follows - /I
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"~.- Profit ·:Jl'"
·r111• Year
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!~ 1 80,000 .,
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2 '
,, 92,000
!
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3 :\; ·
:
85,000
'
4 .. ,
i• 1,05,000
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5 •··,; 1,18,000
,.
'

The average
.
capital eri1ployed
., ;
in a similar business is Rs.. 8,00,000 ~d NRR is I 0%.
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Calculate the valu~ of goodWlll on the basis of 5 years purchase of super pr~fits. Also
calculate g_oodwill!under cap.italization of super profits method. .t

· ·13.
i
The.ad.justed averagej,rofits of the company for the last 4 years are calculated to be
• ll
. :

' Rs.20, 000; after adjti$;ting the average managerial remuneration of Rs.5, 000 p.a .
The NRR i'n similar i4dustries is assumed to be I 0%, the net capital invested into the
bu~iness 'is Rs. 80,00'iJU- . Calculate the value of goodwill on the baMs of 3 years
.· ·purchas_e· of supei' prdfits: Also calculate goodwill under capitalizatiqn of super profits :~
. : .. • • ' •. ' t •
: methocfi· ' ·. · · '•

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' · .· ..· ..· ··· ' ·14. { When Balance She~h $ given)
·: · .' ·.. .·= : :,: . · ·r'iie BiS~f Suman G,riritpany as on 31 Dec 2005
. '. .: . ; . . . I: t.
.... ·
... . ·-··
Liabilities. · Rs. Assets Rs.
;

Equ_ity _Share Capitali('Rs. 5,00,000 Fixed Assets !} 4,00,000

l
JO per share) . , ,' :
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.Gener.al Reserve ,, ?,00,000 Investments ; 1,00,000
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P/L Ale 1,00,000 Current Assets
,.,
: 4,00,000
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Current Liabilities 1,00,000
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...

i,: : 9,00,000 .,. 9,00,000

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.~ td
The net profit of the ~o1mpany after providing the taxation@ 30% for the past 3 years .,
are as follows_: _ii·· . 1.,
~•
· '
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11,30,000
 2004 1,25,000 .
I 2005 ;~·', ',
1,50,000 , Ii i
11 :
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Goodwill is\ o be calculated t 4

o/c0 Tl C ,
.
a yeai s purchase of the average profits. The NRR is 15
?
• 1e U1Tent Assets rev· d I · · ;, · · ·.
u d .h1 ise va ue IS Rs. 4;20,000. Ascertafo the ·value ofgoodwilI
11
er supe~;~rofits me th0 d and capitalization of super pr6fits method. · . ·: ··
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# Annuity Method '.,
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l ~- The net pr?)ttts of a limited company after providing for. ;;c~ti~Il @ _:~a"% focthe'. ~as/
5 years are .as follows - . ·; : . · · ·.
r> '/:ti - - · ·· --. .- •. ·
Af 1
~r,! 40,000
I ti
.,.
!•• ~

I1 2 42,000
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1·'
j: -~ 3 38,000

4 45,000 I.
·•i·

5 55,000 '.}}

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The capital employ~d in the business is Rs. 4, 00,000/- on which :{ reasonable rate ~f return:(~f
10 % is expected. It: •is assumed that the company will earn super 1.profits
i:;_,
for. next
: .
5 years.

Calc1,1late the
.
value~
r
~f goodwill on the basis of 6 years purchase oi!super
.·
prqfits
.
talqilg into· •;"
.
ac<,01,1nt the presen~:v alue of Re. 1 for 5 years @ 10% interest@ ~ s. 3.78/-. • ·
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.
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16. The net profits of a company before providing for taxatioff@ 25% for the past 5
years are as. follows - . C .
1. '

1i
I 80,000 .1.
'; 1
)

2 1,20,000. .:,!
•!-'

3 1,40,000 (I~
;:, ;
.,11 ;
4 1,60,000
=>
.f

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-.,,
_ . _
1
s <~- 1,80,000. _
The capital employed in the business is Rs. 1 1
. : 6 00 000 on which a reasonable:rate ofretum
,;
:• ...
10 % is expected. It is assuni~d that the com ' ' .
of
pany will earn super profits for the next 5 years.
Cal.cul ate the value ·of goodwi~ of the com
pany on the basis of 4 years purc~ase of supe
profits taking into ale the pr~~~nt ~alue of r
Re. 1 for 5 years@ 10% interest Being Rs. 3.78
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