Valuation of goodwill: Class 12 practice
Average profit method: goodwill = average profit × years' purchase. Read the method, follow the three worked examples, then try the six questions.
What you should know first
- Averages
- Percentages
The idea behind valuation of goodwill
Average profit method: goodwill = average profit × years' purchase. Super profit method: (average profit − normal profit) × years' purchase, where normal profit = capital employed × normal rate. Capitalisation of super profit: super profit × 100 ÷ normal rate.
Step-by-step method
- Average the profits (adjust abnormal items).
- Normal profit = capital × normal rate.
- Super profit = average − normal.
- Goodwill = super profit × years (or capitalise).
Worked example 1 (Basic)
Profits for three years: ₹60,000, ₹1,40,000, ₹1,90,000. Goodwill = 2 years' purchase of average profit. Find goodwill.
- Average = ₹1,30,000
- Goodwill = ₹1,30,000 × 2 = ₹2,60,000
- Answer: ₹2,60,000
Worked example 2 (Standard)
Average profit ₹1,20,000, capital employed ₹5,00,000, normal rate 8%. Goodwill at 3 years' purchase of super profit?
- Normal profit = ₹40,000
- Super profit = ₹80,000
- Goodwill = ₹2,40,000
- Answer: ₹2,40,000
Worked example 3 (Challenge)
Average profit ₹1,50,000, capital employed ₹5,00,000, normal rate 15%. Find goodwill by capitalising super profit.
- Super profit = ₹1,50,000 − ₹75,000 = ₹75,000
- Goodwill = ₹75,000 × 100/15 = ₹5,00,000
- Answer: ₹5,00,000
Common mistakes and misconceptions
- Forgetting to adjust abnormal losses
- Using total, not average, profit
Practice questions
- (Basic) Profits for three years: ₹80,000, ₹1,30,000, ₹2,00,000. Goodwill = 2 years' purchase of average profit. Find goodwill.
- (Basic) Profits for three years: ₹1,30,000, ₹2,00,000, ₹1,20,000. Goodwill = 3 years' purchase of average profit. Find goodwill.
- (Standard) Average profit ₹1,00,000, capital employed ₹3,00,000, normal rate 10%. Goodwill at 2 years' purchase of super profit?
- (Standard) Average profit ₹1,16,667, capital employed ₹4,00,000, normal rate 15%. Goodwill at 3 years' purchase of super profit?
- (Challenge) Average profit ₹1,60,000, capital employed ₹3,00,000, normal rate 12%. Find goodwill by capitalising super profit.
- (Challenge) Average profit ₹1,16,667, capital employed ₹4,00,000, normal rate 15%. Find goodwill by capitalising super profit.
Answer key with full working
- Q1: Average = ₹1,36,667 → Goodwill = ₹1,36,667 × 2 = ₹2,73,333 → Answer: ₹2,73,333
- Q2: Average = ₹1,50,000 → Goodwill = ₹1,50,000 × 3 = ₹4,50,000 → Answer: ₹4,50,000
- Q3: Normal profit = ₹30,000 → Super profit = ₹70,000 → Goodwill = ₹1,40,000 → Answer: ₹1,40,000
- Q4: Normal profit = ₹60,000 → Super profit = ₹56,667 → Goodwill = ₹1,70,000 → Answer: ₹1,70,000
- Q5: Super profit = ₹1,60,000 − ₹36,000 = ₹1,24,000 → Goodwill = ₹1,24,000 × 100/12 = ₹10,33,333 → Answer: ₹10,33,333
- Q6: Super profit = ₹1,16,667 − ₹60,000 = ₹56,667 → Goodwill = ₹56,667 × 100/15 = ₹3,77,778 → Answer: ₹3,77,778
Syllabus note
This skill is listed under "Accounting for Partnership: Basic Concepts" for Class 12 in the NCERT/CBSE books. ICSE, IGCSE, IB and state boards may teach it in a different chapter or year.
Answers on this page are generated and automatically re-checked by a second, independent calculation. They have not been reviewed by a teacher — if you spot a problem, tell us on WhatsApp.
Related practice and notes
Frequently asked questions
Which chapter is valuation of goodwill in?
"Accounting for Partnership: Basic Concepts", Class 12 Accountancy (NCERT/CBSE). Other boards may place it differently.
How were the answers checked?
Answers on this page are generated and automatically re-checked by a second, independent calculation. They have not been reviewed by a teacher — if you spot a problem, tell us on WhatsApp.