- From the following information relating to Priya Enterprises, calculate the value of Goodwill on the basis of 4 years purchase of the average profits of 3 years.
- Profit for the years ending 31st December 2016, 2017 and 2018 were ₹ 1,75,000, ₹ 1,50,000 and ₹ 2,00,000 respectively.
- A non-recurring income of ₹ 45,000 is included in the profit of the year 2016.
- The closing stock of the year 2017 was over-valued by ₹ 30,000. OR
- The Balance Sheet of Roja and Raja on 31st March, 2018 is as follows :
| Liabilities | ₹ | ₹ | Assets | ₹ |
|---|---|---|---|---|
| Capital accounts : | Buildings | 50,000 | ||
| Roja | 50,000 | Stock | 8,000 | |
| Raja | 30,000 | 80,000 | Sundry Debtors | 60,000 |
| General Reserve | 40,000 | Cash at Bank | 32,000 | |
| Workmen compensation fund | 10,000 | |||
| Sundry Creditors | 20,000 | |||
| 1,50,000 | 1,50,000 |
They share the Profits and Losses in the ratio of 3 : 1. They agreed to admit Kalpana into the Partnership firm for 1/4 share of profit which she gets entirely from Roja.
Following are the conditions :
- Kalpana has to bring ₹ 20,000 as Capital. Her share of Goodwill is valued at ₹ 4,000. She could not bring cash towards goodwill.
- Depreciate buildings by 10%.
- Stock to be revalued at ₹ 6,000.
- Create provision for Doubtful debts at 5% on debtors. Prepare Revaluation Account and Capital Account after admission.
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Start your 14-day free trial to unlock the full solution →(a) Adjust profits (remove non-recurring income; correct stock overvaluation across 2017 & 2018) → average ₹1,60,000 → goodwill ₹6,40,000. (b) Admission of Kalpana: revaluation loss ₹10,000 shared 3:1, goodwill ₹4,000 to Roja; capitals Roja ₹84,000, Raja ₹40,000, Kalpana ₹16,000.
(a) Goodwill by Average Profit Method — Priya Enterprises (TN HSC Class-12 Accountancy, Goodwill)
Adjustments before averaging:
- Non-recurring income of ₹45,000 in 2016 — abnormal, so deduct from 2016 profit.
- Closing stock of 2017 overvalued by ₹30,000 — overvaluation inflated the 2017 profit, so deduct ₹30,000 from 2017; the same overvalued stock becomes the opening stock of 2018, which understated the 2018 profit, so add ₹30,000 back to 2018.
| Year | Profit given (₹) | Adjustment (₹) | Adjusted profit (₹) |
|---|---|---|---|
| 2016 | 1,75,000 | − 45,000 (non-recurring income) | 1,30,000 |
| 2017 | 1,50,000 | − 30,000 (closing stock overvalued) | 1,20,000 |
| 2018 | 2,00,000 | + 30,000 (opening stock overvalued) | 2,30,000 |
| Total | 4,80,000 |
Average profit = 4,80,000 ÷ 3 = ₹1,60,000.
Goodwill = Average profit × Years of purchase = 1,60,000 × 4 = ₹6,40,000.
(b) Admission of Kalpana — Roja and Raja (3 : 1)
Kalpana gets 1/4 entirely from Roja, so only Roja sacrifices. New ratio: Roja 3/4 − 1/4 = 1/2; Raja 1/4; Kalpana 1/4 (i.e. 2 : 1 : 1).
Revaluation items: Buildings depreciated 10% = 5,000 loss; Stock 8,000 → 6,000 = 2,000 loss; Provision for doubtful debts 5% of 60,000 = 3,000 loss.
Revaluation Account
| Dr. Particulars | ₹ | Cr. Particulars | ₹ |
|---|---|---|---|
| To Buildings A/c | 5,000 | By Loss transferred to: | |
| To Stock A/c | 2,000 | Roja's Capital 7,500 | |
| To Provision for doubtful debts A/c | 3,000 | Raja's Capital 2,500 | 10,000 |
| Total | 10,000 | Total | 10,000 |
| … |
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