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Question
Calculate goodwill of a firm on the basis of three years' purchase of the Weighted Average Profit of the last four years. The profits of the last four financial years ended 31st March, were: 2016 − ₹ 25,000; 2017 − ₹ 27,000; 2018 − ₹ 46,900 and 2019 − ₹ 53,810. The weights assigned to each year are: 2016 − 1; 2017 − 2; 2018 − 3; 2019 − 4. You are supplied the following information:
(i) On 1st April, 2016, a major plant repair was undertaken for ₹ 10,000 which was charged to revenue. The said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% on Reducing Balance Method.
(ii) The Closing Stock for the years ended 31st March, 2017 and 2018 were overvalued by ₹ 1,000 and ₹ 2,000 respectively.
(iii) To cover management cost an annual charge of ₹ 5,000 should be made for the purpose of goodwill valuation.
Solution
|
Particulars |
Year |
31st Mar., 2016 |
31st Mar., 2017 |
31st Mar., 2018 |
31st Mar., 2019 |
|
Profit |
25,000 |
27,000 |
46,900 |
53,810 |
|
|
Add: Repairs to Plant Capitalised |
|
10,000 |
|
|
|
|
Less: Depreciation @10% W.D.V |
|
1,000 |
900 |
810 |
|
|
Less: Overvaluation of Closing Stock |
|
1,000 |
2,000 |
|
|
|
Add: Overvaluation of Opening Stock |
|
|
1,000 |
2,000 |
|
|
Less: Annual Charge |
5,000 |
5,000 |
5,000 |
5,000 |
|
|
Normal Profit/Loss |
20,000 |
30,000 |
40,000 |
50,000 |
|
|
Year |
Normal Profits (₹) |
Weights |
Weighted Profits (₹) |
|
31st March, 2016 |
20,000 |
1 |
20,000 |
|
31st March, 2017 |
30,000 |
2 |
60,000 |
|
31st March, 2018 |
40,000 |
3 |
1,20,000 |
|
31st March, 2019 |
50,000 |
4 |
2,00,000 |
|
Total |
10 |
4,00,000 |
|
Weighted Average Profits = `("Total of Weighted Profits"/ "Total Weights")`
= Rs. `([4,00,000]/10)`
= Rs. 40,000
Goodwill = Weighted Average Profits x No. of Years of Purchase
= Rs. ( 40,000 x 3)
= Rs. 1,20,000
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