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Question
Mahesh and Suresh are partners and they admit Naresh into partnership. They agreed to value goodwill at three years' purchase on Weighted Average Profit Method taking profits for the last five years. They assigned weights from 1 to 5 beginning from the earliest year and onwards. The profits for the last five years were as follows:
| Year Ended | 31st March, 2015 | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 |
| Profits (₹) | 1,25,000 | 1,40,000 | 1,20,000 | 55,000 | 2,57,000 |
Scrutiny of books of account revealed the following:
(i) A second-hand machine was purchased for ₹ 5,00,000 on 1st July, 2017 and ₹ 1,00,000 were spent to make it operational. ₹ 1,00,000 were wrongly debited to Repairs Account. Machinery is depreciated @ 20% p.a. on Written Down Value Method.
(ii) Closing Stock as on 31st March, 2018 was undervalued by ₹ 50,000.
(iii) Remuneration to partners was to be considered as charge against profit and remuneration of ₹ 20,000 p.a. for each partner was considered appropriate.
Calculate the value of goodwill.
Solution
|
Particulars |
Year |
31st Mar., 2015(₹) |
31st Mar., 2016(₹) |
31st Mar., 2017(₹) |
31st Mar., 2018(₹) |
31st Mar., 2019(₹) |
|
Profit |
1,25,000 |
1,40,000 |
1,20,000 |
55,000 |
2,57,000 |
|
|
Add: Repairs on new machine wrongly |
|
|
|
1,00,000 |
|
|
|
debited |
|
|
|
|
|
|
|
Less: Depreciation on Machine (20% p.a.) |
|
|
|
15,000 |
17,000 |
|
|
Add: Undervaluation of Closing Stock |
|
|
|
50,000 |
|
|
|
Less: Undervaluation of Opening Stock |
|
|
|
|
50,000 |
|
|
Less: Remuneration to Partners |
40,000 |
40,000 |
40,000 |
40,000 |
40,000 |
|
|
Normal Profit/Loss |
85,000 |
1,00,000 |
80,000 |
1,50,000 |
1,50,000 |
|
|
Year |
Normal Profits (₹) |
Weights |
Weighted Profits (₹) |
|
31st Mar., 2015 |
85,000 |
1 |
85,000 |
|
31st Mar., 2016 |
1,00,000 |
2 |
2,00,000 |
|
31st Mar., 2017 |
80,000 |
3 |
2,40,000 |
|
31st Mar., 2018 |
1,50,000 |
4 |
6,00,000 |
|
31st Mar., 2019 |
1,50,000 |
5 |
7,50,000 |
|
Total |
15 |
18,75,000 |
|
Weighted Average Profits = `("Total of Weighted Profits"/"Total of Weights")` = Rs. `( [18,75,000]/15)` = Rs. 1,25,000
Goodwill = Weightes Average Profits x No. of Years of Purchase
= Rs. ( 1,25,000 x 3 )
= Rs. 3,75,000
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