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TS Grewal Class 12 Accountancy Solutions Vol 1 Chapter 3
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Goodwill is the good name or the reputation of the business, which is earned by a firm through the hard work and honesty of its owners. This chapter further includes the following topics.
Features of Goodwill:-
- It is an intangible asset
- It is a valuable asset
- It helps earn excess profits
- Its value is liable to constant fluctuations
- It is valuable only when the entire business is sold
- It is difficult to place an exact value on goodwill.
Goodwill is divided into:-
- Purchase of Goodwill: it means goodwill for which consideration has been paid when a business is purchased the excess of purchase consideration of its net assets is the purchases goodwill. It is separately recorded in the books because as it is purchased by paying in form of cash or kind.
- Self-generated goodwill: it is also called inherent goodwill. It is an internally generated goodwill that arises from several factors that a running business possesses due to which it can earn more Profits in the future.
Factors affecting the value of goodwill:-
- Efficient Management
- Quality of Products
- Location of business
- The longevity of the business
- Monopolistic and other Rights
Need for valuing goodwill: whenever the mutual rights of the partners change the party which makes a sacrifice must be compensated. The basis of compensation is goodwill so we need to calculate goodwill.
Methods of calculating Goodwill
- Average Profit Method:- Goodwill = Average Profits × number of years purchase
- Weighted Average Profit Method:- Weighted Average Profit:- Total Products of profits / Total of weights
Goodwill: Weighted Average Profit × Number of years purchase
- Super Profit Method:- Goodwill = Super Profit × Number of years purchased
Super Profit = Average Profit – Normal Profit
- Capitalized Profit:-
- Average Profit Method
The capitalized value of the firm = (Average Normal Profit × 100) / Normal rate of return
Goodwill= Capitalised value of average Profits – Capital Employed
- Super Profit Method
Goodwill of the firm = (Super Profit × 100)/ Normal Rate of Return
TS Grewal Class 12 Accountancy Solutions Vol 1 Chapter 3 Sample Question
In this section, the students will get TS Grewal Class 12 Accountancy Solutions Vol 1 Chapter 3 Sample Question. These will provide a glimpse of the questions.
Q. Goodwill is to be valued at three year’s purchase of dour years’ average Profit. Profits for the last four years ending on 31st March of the firm were:
- 2016- Rs 12,000
- 2017- Rs 18,000
- 2018- Ra 16,000
- 2019- Rs 14,000
Calculate the amount of Goodwill.
- Goodwill= Average Profit × Total year’s purchase
Average Profit = Total Profit for past given years/ Number of Years
= (12,0000 + 18,000+ 16,000 + 14,000) / 4
= 60,000/4
= Rs 15,000
Numbers of year’s purchased = 3
So, Goodwill = 15,000 × 3 = Rs 45,000
Q. Define Goodwill.
A. Goodwill is a thing very easy to describe but very difficult to define. It is the benefit and advantage of the good name, reputation, and connections of a business. It is the attractive force that brings in customers. It is one thing that distinguishes an old-established business from a new business at its first start.
Q. What is meant by Self Generated Goodwill?
A. Self-Generated goodwill is that goodwill is not purchased for consideration but is earned by the efforts of the management (or Partners). It is an internally generated goodwill that arises from several factors such as favorable location, efficient management, good quality of products, etc. That running business possesses due to which it can earn higher Profit.
We have included complete information regarding CBSE TS Grewal Class 12 Accountancy Solutions Vol 1 Chapter 3 – Goodwill- Nature and Valuation. If you have any questions feel free to ask in the comment section.
FAQ: TS Grewal Class 12 Accountancy Solutions Vol 1 Chapter 3 – Goodwill- Nature and Valuation
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What is the nature of goodwill?
The nature of goodwill can be described as follows: … Goodwill is an intangible fixed asset. It is intangible because it has no physical existence. It cannot be seen or touched.
What is the valuation of goodwill in accounts?
The valuation of goodwill is often based on the customs of the trade and generally calculated as a number of year’s purchases of average profits or super-profits.
What is the need for the valuation of goodwill?
Goodwill is recorded in the books only when some consideration in money or money’s worth is paid for it. Thus, in the context of a partnership firm, the need for valuation of goodwill arises at the time of Change in the profit-sharing ratio amongst the existing partners.