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Question
Calculate the goodwill of a firm on the basis of three years' purchase of the weighted average profit of the last four years. The appropriate weights to be used and profits are:
| Year | 2015-16 | 2016-17 | 2017-18 | 2018-19 |
| Profits (₹) | 1,01,000 | 1,24,000 | 1,00,000 | 1,40,000 |
| Weights | 1 | 2 | 3 | 4 |
On a scrutiny of the accounts, the following matters are revealed:
- On 1st December, 2017, a major repair was made in respect of the plant incurring ₹ 30,000, which was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on the Reducing Balance Method.
- The closing stock for the year 2016-17 was overvalued by ₹ 12,000.
- To cover management costs, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.
- On 1st April, 2016, a machine having a book value of ₹ 10,000 was sold for ₹ 11,000 but the proceeds were wrongly credited to the Profit and Loss Account. No effect has been given to rectify the same. Depreciation is charged on machine @ 10% p.a. on reducing balance method.
Solution
| Particulars | 2015-16 | 2016-17 | 2017-18 | 2018-19 |
| Profits | 1,01,000 | 1,24,000 | 1,00,000 | 1,40,000 |
| Repair Capitalised | 30,000 | |||
| (−) Depreciation | (1,000) | (2,900) | ||
| (−) Overvaluation of Closing Stock | (12,000) | |||
| Overvaluation of Closing Stock | 12,000 | |||
| Management Cost | (24,000) | (24,000) | (24,000) | (24,000) |
| Sale Proceeds | (10,000) | |||
| Wrong Depreciation | 810 | |||
| Adjusted Profits | 77,000 | 78,000 | 1,17,900 | 1,13,910 |
| Weights | 1 | 2 | 3 | 4 |
| Product | 77,000 | 1,56,0000 | 3,53,700 | 4,55,640 |
Working Notes:
Depreciation on Plant:
| Particulars | ₹ |
| Original Cost | 30,000 |
| (−) Depreciation @ 10% for 4 months (2017-18) | (1000) |
| Written-down value | 29,000 |
| (−) Depreciation @ 10% (2018-19) | (2900) |
| Written-down value | 26,100 |
Depreciation on Machinery:
| Particulars | ₹ |
| Cost of Machine | 10,000 |
| (−) Depreciation for (2016-17) @ 10% | (1000) |
| Written-down value | 9,000 |
| (−) Depreciation for @ 10% (2017-18) | (900) |
| Written-down value | 8,100 |
| (−) Depreciation for @ 10% (2017-18) | 810 |
Weighted average profit = `"Total of weighted profit"/"Total of weighs"`
= `(77000 + 156000 + 353700 + 455640)/(1 + 2 + 3 + 4)`
= `1042340/10`
= 104234
Goodwill = Weighted average profit × No. of years purchase
= 104234 × 3
= 312702
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