Dear Teachers,
These slides have been prepared based on the NCERT syllabus to support you in teaching Plus One and Plus Two Accountancy and Computerised Accounting.
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Mujeeb Rahiman C
HSST Commerce
GHSS Pattikkad
Malappuram Dt.
✉️ mujeebchemmala@gmail.com
9995983075 �
Chapter - 2
Reconstitution of a Partnership Firm
Admission of a Partner
GOODWILL
പുനസംഘടിപ്പിക്കപ്പെട്ടാല് എന്തെല്ലാം മാറ്റങ്ങളാണ് അക്കൗണ്ടുകളില് ചെയ്യേണ്ടത്
Important points which
require attention at the time
of admission of a new partner
1. calculation of new ratio
2. calc. Of SR
3. valuation of goodwil
4. revaluation of assets etc.
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.
Goodwill is an intangible asset. it is the value of reputation of a firm which enables it to earn higher profits in comparison to the normal profits earned by other firms in the same industry.
Classification of Goodwill
It is the Goodwill which is acquired by making a payment. eg. When a business is purchased, the excess of purchase consideration over its net assets (ie. Assets – Liabilities) is referred to as purchased goodwill. It is shown in the Balance Sheet.
1. Purchased Goodwill
2. Self generated Goodwill or inherited Goodwill
It is internally generated goodwill which arises from a number of characteristics which an on going business possesses. As per Accounting Standards 26, it is not recorded in the books of accounts because consideration in money or money’s worth has not been paid for it.
Factors Affecting the Value of Goodwill
If a firm deals in high quality goods or goods of daily use, it will have steady profits as demand for these goods will be stable. Such business will have more Goodwill.
1. Nature of Business
2. Favourable Location of Business
If a business is centrally located or is at place having heavy customer traffic, the Goodwill tends to be high.
3. Efficiency of Management
If a business is run by experienced and efficient management, its profit will go on increasing, which results in increase in the value of Goodwill.
4. Market Situation
The monopoly condition or limited competition enable the business to earn high profits which leads to higher value of Goodwill.
Windows
5. Special Advantage
A firm that enjoys special advantages like import licences, patent right, trade mark, assured supply of electricity etc. Enjoy higher value of Goodwill.
Factors Affecting the Value of Goodwill
1. Nature of Business
2. Favourable Location of Business
3. Efficiency of Management
4. Market Situation
5. Special Advantage
Need for Valuation of Goodwill
1. Change in the profit sharing ratio
Old Ratio 1:1
New Ratio 2:1
2. Admission of new partner
3. Retirement of a partner
4. Death of a partner
5. Sale of business
6. Amalgamation of partnership
Need for Valuation of Goodwill
1. Change in the profit sharing ratio
2. Admission of new partner
3. Retirement of a partner
4. Death of a partner
5. Sale of business
6. Amalgamation of partnership
MUJEEB RAHIMAN C
HSST COMMERCE
GHSS PATTIKKAD
MALAPPURAM DT
Methods of Valuation of Goodwill
പുനസംഘടിപ്പിക്കപ്പെട്ടാല് എന്തെല്ലാം മാറ്റങ്ങളാണ് അക്കൗണ്ടുകളില് ചെയ്യേണ്ടത്
Important points which
require attention at the time
of admission of a new partner
1. calculation of new ratio
2. calc. Of SR
3. valuation of goodwil
4. revaluation of assets etc.
Methods of Valuation of Goodwill
3. Super Profit Method
4. Capitalisation of Average Profit Method
1. Average Profit Method
It is very difficult to accurately calculate its value. Goodwill calculated by one method may differ from the goodwill calculated by another method.
2. Weighted Average Profit Method
5. Capitalisation of Super Profit Method
1. Average Profit Method
It is based on the assumption that a new business will not be able to earn any profits during the first few years. Hence, the person who purchases a running business must pay in the form of goodwill a sum which is equal to the profits he is likely to receive for the first few years.
Under this method, the goodwill is valued at agreed number of years’ purchase of the average profits of the past few years.
Goodwill = Average Profits x Number of years of Purchase
Illustration 1
The profit for the five years of a firm are – 2013 Rs. 52,000; 2014 Rs. 25,000 (Loss); 2015 Rs. 45,000; 2016 Rs. 35,000 and 2017 Rs. 43,000. Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits.
Goodwill = Average Profits x Number of years of Purchase
Average Profits =
Total Profits
No. of years
=
52000-25000+45000+35000+43000
5
150,000
5
=
30,000
=
Goodwill =
Average Profits x No. of year purchases
=
30,000 x 4
1,20,000
=
Illustration 2
Calculate goodwill of the firm on the basis of 3 years’ purchase of the average profits of the last five years. The profits of the last five years were :
Year Amount
2015 2,00,000
2016 1,70,000
2017 50,000
2018 1,50,000
2019 1,80,000
On 1st Mar 2017, a fire broke out which resulted into a loss of Rs. 1,00,000
+ 1,00,000 = 1,50,000
Abnormal loss
Average Profits =
Total Profits
No. of years
=
200000+170000+150000+150000+180000
5
850,000
5
=
1,70,000
=
Goodwill =
Average Profits x No. of year purchases
=
1,70,000 x 3
5,10,000
=
Goodwill = Average Profits x Number of years of Purchase
2. Weighted Average Profit Method
This is a modified version of average profit method. If there exists an increasing on decreasing trend in profit, it is considered to be better to give a weightage to the profits. The highest weight is given to the profit of the most recent year.
Goodwill = Weighted Average Profits x Number of years of Purchase
Illustration 3
The profits of a firm for the last five years were as follows
Year ended 31st March Profit
2015 43,000
2016 50,000
2017 52,000
2018 65,000
2019 85,000
You are required to calculate the value of goodwill on the basis of two years’ purchase of weighted average profits. The weights used are :
2015 - 1, 2016 - 2, 2017 - 3, 2018 - 4 and 2019 - 5
Year ended 31st March Profit
2015 43,000
2016 50,000
2017 52,000
2018 65,000
2019 85,000
Weight
Product
1
2
3
4
5
43,000
1,00,000
1,56,000
2,60,000
4,25,000
9,84,000
15
Goodwill = Weighted Average Profits x Number of years of Purchase
(Profit x weight)
Year ended 31st March Profit
2015 43,000
2016 50,000
2017 52,000
2018 65,000
2019 85,000
Weight
Product
1
2
3
4
5
43,000
1,00,000
1,56,000
2,60,000
4,25,000
9,84,000
15
Goodwill = Weighted Average Profits x Number of years of Purchase
Weighted Average Profits =
Total of products of Profits
Total of weights
9,84,000
15
=
65,600
=
65,600
1,31,200
=
Goodwill =
x 2
(Profit x weight)
You are required to calculate the value of goodwill on the basis of two years’ purchase of weighted average profits. The weights used are :
2015 - 1, 2016 - 2, 2017 - 3, 2018 - 4 and 2019 - 5
Illustration 4
Calculate goodwill of a firm on the basis of three year’ purchase of the weighted average profits of the last four years. The profit of the last four years were:
2012 Rs. 20,200; 2013 Rs. 24,800; 2014 Rs. 20,000 and 2015 Rs. 30,000.
The weights assigned to each year are : 2012 – 1; 2013 – 2; 2014 – 3 and 2015 – 4.
You are supplied the following information:
1. On September 1, 2014 a major plant repair was undertaken for Rs. 6,000, which was charged to revenue. The said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.
2. The Closing Stock for the year 2013 was overvalued by Rs. 2,400.
3. To cover management cost an annual charge of Rs. 4,800 should be made for purpose of goodwill valuation.
Illustration 4
Calculate goodwill of a firm on the basis of three year’ purchase of the weighted average profits of the last four years. The profit of the last four years were:
2012 Rs. 20,200; 2013 Rs. 24,800; 2014 Rs. 20,000 and 2015 Rs. 30,000.
The weights assigned to each year are : 2012 – 1; 2013 – 2; 2014 – 3 and 2015 – 4.
You are supplied the following information:
Calculation of Adjusted Profit
2012 Rs.
2013 Rs.
2014 Rs.
2015 Rs.
Given Profits
20,200
24,800
20,000
30,000
Calculation of Adjusted Profit
2012 Rs.
2013 Rs.
2014 Rs.
2015 Rs.
Given Profits
20,200
24,800
20,000
30,000
1. On September 1, 2014 a major plant repair was undertaken for Rs. 6,000, which was charged to revenue. The said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.
Add Capital exp. charged to Revenue exp.
6,000
20,200
24,800
26,000
30,000
Less unprovided Depreciation
200
580
20,200
24,800
25,800
29,420
Depreciation of 2014
= 10% of Rs. 6000 for 4 months
= 6000 × 10/100 × 4/12 = 200
Depreciation of 2015
= 10% of 6000 – 200 for one year
= 5800 × 10/100 = 580
Calculation of Adjusted Profit
2012 Rs.
2013 Rs.
2014 Rs.
2015 Rs.
Given Profits
20,200
24,800
20,000
30,000
Add Capital charged to Revenue
6,000
20,200
24,800
26,000
30,000
Less unprovided Depreciation
200
580
20,200
24,800
25,800
29,420
2. The Closing Stock for the year 2013 was overvalued by Rs. 2,400.
Less over valuation of closing stock
2,400
20,200
22,400
25,800
29,420
Add over valuation of opening stock
2,400
20,200
22,400
28,200
29,420
Calculation of Adjusted Profit
2012 Rs.
2013 Rs.
2014 Rs.
2015 Rs.
Given Profits
20,200
24,800
20,000
30,000
Add Capital charged to Revenue
6,000
20,200
24,800
26,000
30,000
Less unprovided Depreciation
200
580
20,200
24,800
25,800
29,420
Less over valuation of closing stock
2,400
20,200
22,400
25,800
29,420
Add over valuation of opening stock
2,400
20,200
22,400
28,200
29,420
Less Management Cost
15,400
17,600
23,400
24,620
3. To cover management cost an annual charge of Rs. 4,800 should be made for the purpose of goodwill valuation.
4,800
4,800
4,800
4,800
Adjusted Profits
2012 Rs.
2013 Rs.
2014 Rs.
2015 Rs.
Year Profit
2012 15,400
2013 17,600
2014 23,400
2015 24,620
Weight
Product
1
2
3
4
15,400
35,200
70,200
98,480
2,19,280
10
15,400
17,600
23,400
24,620
Adjusted Profits
Calculation of weighted average profits
Weighted Average Profits =
Total of products of Profits
Total of weights
2,19,280
10
=
21,928
=
21,928
65,784
=
Goodwill =
x 3
Illustration 4
Calculate goodwill of a firm on the basis of three year’ purchase of the weighted average profits of the last four years. The profit of the last four years were:
2012 Rs. 20,200; 2013 Rs. 24,800; 2014 Rs. 20,000 and 2015 Rs. 30,000.
The weights assigned to each year are : 2012 – 1; 2013 – 2; 2014 – 3 and 2015 – 4.
You are supplied the following information:
(Profit x weight)
3. Super Profit Method
In this method Goodwill is calculated on the basis of excess profit earned by a firm in comparison to average profits earned by other firms. Such excess profit is called Super Profit and the goodwill is calculated on the basis of super profits. If a business has no anticipated excess earnings, it will have no goodwill.
For example, if the normal rate of earning applicable in a particular type of business is 10%. Our firm is also engaged in the same type of business and we have invested Rs. 1,00,000 as capital and we are earning an average profit of Rs. 25,000.
Normal Profit = 1,00,000 x 10% = 10,000
Average Profit = 25,000
Super Profit = 25,000 – 10,000 = 15,000
Goodwill is calculated by multiplying the Super Profits by a reasonable number of years, such as two years’ purchase or three years’ purchase etc.
The steps involved under Super Profit Method are :
Goodwill = Super Profits x No. of years’ Purchase
1. Calculation of Average Profit
2. Calculation of Normal Profit
3. Calculation of Super Profit
4. Calculation of Goodwill
Normal Profit = Capital Invested x Normal Rate
100
Super Profit = Average Profit – Normal Profit
Average Profit = Total Profits
No. of years
Illustration 5
The books of a business showed that the capital employed on December 31, 2015, Rs. 5,00,000 and the profits for the last five years were: 2011– Rs. 40,000: 2012-Rs. 50,000; 2013-Rs. 55,000; 2014-Rs.70,000 and 2015-Rs. 85,000. 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%.
Average Profit = Total Profit / No. Of Years
= (40,000+50,000+55,000+70,000+85,000) / 5
= 3,00,000 / 5
= 60,000
Normal Profit = Capital Employed x Normal Rate /100
= 5,00,000 x 10 / 100
= 50,000
Super Profit = Average Profit – Normal Profit
= 60,000 – 50,000
= 10,000
Goodwill = Super Profit x No. Of years’ purchase
Goodwill = 10,000 x 3
= 30,000
Illustration 6
Amit and Kartik are parters sharing profits and losses equally. They decided to admit Subash for an equal share in future profits. The Balance sheet of the firm was as follows :
Balance Sheet as on 31st March 2019
Amt.
Liabilities
Amt.
Assets
Capitals
Amit 90,000
140,000
Kartik 50,000
Reserve
20,000
Loan
25,000
Sundry Creditors
5,000
Machinery
75,000
Furniture
15,000
Stock
30,000
Sundry Debtors
20,000
Cash
50,000
1,90,000
1,90,000
The normal rate of return is 12% per annum. Average profits of the firm for the last four years was Rs. 30,000. Calculate value of Goodwill on the basis of four years’ purchase of super profits.
Balance Sheet as on 31st March 2019
Amt.
Liabilities
Amt.
Assets
Capitals
Amit 90,000
140,000
Kartik 50,000
Reserve
20,000
Loan
25,000
Sundry Creditors
5,000
Machinery
75,000
Furniture
15,000
Stock
30,000
Sundry Debtors
20,000
Cash
50,000
1,90,000
1,90,000
The normal rate of return is 12% per annum. Average profits of the firm for the last four years was Rs. 30,000. Calculate value of Goodwill on the basis of four years’ purchase of super profits.
Capital Employed = Assets - Liabilities
Capital Employed = 1,90,000 – 25,000 – 5,000 = 1,60,000
Goodwill = Super Profit x No. Of years’ purchase
Average Profit = 30,000
Average Profit = 30,000
Normal Profit = Capital Employed x Normal Rate /100
= 1,60,000 x 12 / 100
= 19,200
Super Profit = Average Profit – Normal Profit
= 30,000 – 19,200
= 10,800
Goodwill = 10,800 x 4
= 43,200
The normal rate of return is 12% per annum. Average profits of the firm for the last four years was Rs. 30,000. Calculate value of Goodwill on the basis of four years’ purchase of super profits.
Capital Employed = Assets - Liabilities
Capital Employed = 1,90,000 – 25,000 – 5,000 = 1,60,000
Goodwill = Super Profit x No. Of years’ purchase
MUJEEB RAHIMAN C
HSST COMMERCE
GHSS PATTIKKAD
MALAPPURAM DT
4. Capitalisation of Average Profit Method
Under this method first of all we calculate the average profits and then we asses the capital needed for earning such average profits on the basis of normal rate of return. Such capital is called capitalised value of average profits
Average Profit x
100
Normal Rate of Return
Capitalised Value
of Average Profits
=
Capital Employed = Total Assets – Outside Liabilities
(excluding goodwill)
Goodwill = Capitalised Value of Average Profit – Capital Employed
Illustration 7
A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 10%. Ascertain the value of goodwill by capitalisation of average profits method, given that the total assets is Rs. 11,20,000 and liabilities Rs. 3,00,000.
Average Profit = 1,00,000
Capitalised value = Average Profit x 100 / Normal Rate
= 1,00,000 x 100 / 10
= 10,00,000
Capital Employed = Assets - Liabilities
= 11,20,000 – 3,00,000
= 8,20,000
Goodwill = Capitalised Value of Average Profit – Capital Employed
Goodwill = 10,00,000 - 8,20,000
= 1,80,000
Illustration 8
Anil and Sunil are partners in a business. Balance in Capital and Current Accounts on 31st March, 2019 were
Capital Account Current Account
Anil Rs. 5,00,000 Rs. 80,000
Sunil Rs. 3,50,000 Rs. 20,000 (Dr.)
Average Profits of the last five years is Rs. 1,20,000
General Reserve appeared in the books at Rs. 50,000
If the normal rate of return is 10%, find the value of goodwill by the Capitalisation of Average Profit Method.
Capital Account Current Account
Anil Rs. 5,00,000 Rs. 80,000
Sunil Rs. 3,50,000 Rs. 20,000 (Dr.)
Average Profits of the last five years is Rs. 1,20,000
General Reserve appeared in the books at Rs. 50,000
If the normal rate of return is 10%, find the value of goodwill by the Capitalisation of Average Profit Method.
Goodwill = 12,00,000 - 9,60,000
= 2,40,000
Average Profit = 1,20,000
Capitalised value = Average Profit x 100 / Normal Rate
= 1,20,000 x 100 / 10
= 12,00,000
Capital Employed = Capital A/c + Current A/c + General Reserve
= 5,00,000+3,50,000+80,000-20,000+50,000
= 9,60,000
Goodwill = Capitalised Value of Average Profit – Capital Employed
5. Capitalisation of Super Profit Method
Under this method first of all we calculate the super profits and then we asses the capital needed for earning such super profits on the basis of normal rate of return. Such capitalised value is the amount of Goodwill.
Super Profit x
100
Normal Rate of Return
Goodwill
=
Super Profit = Average Profit – Normal Profit
Illustration 9
Rama Brothers earn an average profit of Rs. 30,000 with a capital of Rs. 2,00,000. The normal rate of return in the business is 10%. Using capitalisation of super profits method work out the value of goodwill of the firm.
Average Profit = 30,000
Normal Profit = Capital Employed x Normal Rate / 100
= 2,00,000 x 10 / 100
= 20,000
Super Profit = Average Profit – Normal Profit
= 30,000 – 20,000
= 10,000
Goodwill = 10,000 x 100 / 10
= 1,00,000
Super Profit x
100
Normal Rate of Return
Goodwill
=
MUJEEB RAHIMAN C
HSST COMMERCE
GHSS PATTIKKAD
MALAPPURAM DT