1. The goodwill of a firm is to be worked out at three years' purchase of the average profits of the last five years which are as follows:

| Years | Profits (Loss) (₹) |
|-------|---:|
| 2012 | 10,000 |
| 2013 | 15,000 |
| 2014 | 4,000 |
| 2015 | (5,000) |
| 2016 | 6,000 |

2. T

Question

1. The goodwill of a firm is to be worked out at three years' purchase of the average profits of the last five years which are as follows:

| Years | Profits (Loss) (₹) |
|-------|---:|
| 2012 | 10,000 |
| 2013 | 15,000 |
| 2014 | 4,000 |
| 2015 | (5,000) |
| 2016 | 6,000 |

2. The capital of the firm is ₹1,00,000 and normal rate of return is 8%, the average profits for last 5 years are ₹12,000 and goodwill is to be worked out at 3 years' purchase of super profits,

3. Rama Brothers earn an average profit of ₹30,000 with a capital of ₹2,00,000. The normal rate of return in the business is 10%. Using capitalisation of super profits method work out the value the goodwill of the firm.

Accepted Answer

> [!TLDR]
> Part 1 (average profits, 3 years' purchase) = **₹18,000**; Part 2 (super profits, 3 years' purchase) = **₹12,000**; Part 3 (capitalisation of super profits) = **₹1,00,000**.

### Concept
This three-part NCERT Class 12 goodwill valuation exercise contrasts the three standard approaches on separate data sets. Part 1 shows the **Average Profits Method**, where a loss year must be *subtracted* while totalling. Part 2 shows the **Super Profits Method** using a small number of years' purchase. Part 3 shows the **Capitalisation of Super Profits Method**, where the super profit is treated as a perpetual return and multiplied by 100 ÷ normal rate — which is why it produces a much larger figure than a 3-year purchase would.

### Working Notes
- Part 1: Average Profit = Total Profits (losses subtracted) ÷ Number of years; Goodwill = Average Profit × years' purchase.
- Part 2: Normal Profit = Capital × Normal Rate ÷ 100; Super Profit = Average Profit − Normal Profit; Goodwill = Super Profit × years' purchase.
- Part 3: Goodwill = Super Profit × 100 ÷ Normal Rate of Return.

### Solution

**Part 1 — Average Profits Method**

| Years | Profit / (Loss) (₹) |
|-------|---:|
| 2012 | 10,000 |
| 2013 | 15,000 |
| 2014 | 4,000 |
| 2015 | (5,000) |
| 2016 | 6,000 |
| **Total** | **30,000** |

Average Profit = ₹30,000 ÷ 5 = ₹6,000
Goodwill = ₹6,000 × 3 = ₹18,000

**Part 2 — Super Profits Method (3 years' purchase)**

| Particulars | Amount (₹) |
|-------------|---:|
| Normal Profit (₹1,00,000 × 8%) | 8,000 |
| Average Profit | 12,000 | …

Factor	What It Means
Location	A shop in a busy market has higher goodwill than one in a remote area.
Quality of products/services	Consistent quality builds customer loyalty.
Efficiency of management	Good managers keep costs low and profits high.
Nature of business	A business with stable demand (e.g., essential goods) has more reliable goodwill.
Favourable contracts	Long-term supply or sales agreements add value.
Customer loyalty	Repeat customers reduce marketing costs.
Market conditions	Monopoly or limited competition increases goodwill.

Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	Premium for Goodwill A/c Dr.		xxx
	To Existing Partners' Capital A/cs (in sacrificing ratio)			xxx

Concept understanding — Goodwill Definition Factors

Goodwill: The Invisible Asset of a Business

Start with an Everyday Intuition

The Precise Meaning (NCERT Definition)

Why Does Goodwill Matter?

Factors Affecting the Value of Goodwill

Accounting Treatment: The Journal Entry

Proforma: Partners' Capital Account (When Goodwill is Brought in Cash)

Concept

Working Notes

Solution

Years	Profit / (Loss) (₹)
2012	10,000
2013	15,000
2014	4,000
2015	(5,000)
2016	6,000
Total	30,000

Concept

Working Notes

Solution

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