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Question
Manbir and Nimrat are partners and they admit Anahat into partnership. It was agreed to value goodwill at three years' purchase on Weighted Average Profit Method taking profits of last five years. Weights assigned to each year as 1, 2, 3, 4 and 5 respectively to profits for the year ended 31st March, 2015 to 2019. The profits for these years were: ₹ 70,000, ₹ 1,40,000, ₹ 1,00,000, ₹ 1,60,000 and ₹ 1,65,000 respectively.
Scrutiny of books of account revealed following information:
(i) There was an abnormal loss of ₹ 20,000 in the year ended 31st March, 2015.
(ii) There was an abnormal gain (profit) of ₹ 30,000 in the year ended 31st March, 2016.
(iii) Closing Stock as on 31st March, 2018 was overvalued by ₹ 10,000.
Calculate the value of goodwill.
Solution
Goodwill = Weighted Average Profit x No. of Years' Purchase
= 1,39,000 x 3 = Rs. 4,17,000
Working Notes:
WN: 1 Calculation of Normal Profits:
|
Year |
Profit/(Loss) (₹) |
Adjustment |
Normal Profit (₹) |
|
31 March, 2015 |
70,000 |
20,000 |
90,000 |
|
31 March, 2016 |
1,40,000 |
(30,000) |
1,10,000 |
|
31 March, 2017 |
1,00,000 |
- |
1,00,000 |
|
31 March, 2018 |
1,60,000 |
(10,000) |
1,50,000 |
|
31 March, 2019 |
1,65,000 |
10,000 |
1,75,000 |
WN: 2 Calculations of Weighted Average Profits:
|
Year |
Normal Profit |
Weight |
Product |
|
31 March, 2015 |
90,000 |
1 |
90,000 |
|
31 March, 2016 |
1,10,000 |
2 |
2,20,000 |
|
31 March, 2017 |
1,00,000 |
3 |
3,00,000 |
|
31 March, 2018 |
1,50,000 |
4 |
6,00,000 |
|
31 March, 2019 |
1,75,000 |
5 |
8,75,000 |
|
Total |
|
15 |
20,85,000 |
Weighted Average Profit = `"Total of Profit Product"/"Total of Weights"`
= `[20,85,000]/15`
= Rs. 1,39,000.
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