Question

Calculate the value of goodwill on the basis of three year’s purchase of the weighted average profits of the last five years. Profits to be weighted 1, 2, 3, 4 and 5, the greatest weightage to be given to last year. Profits of the last five years were:

Year ended	(₹)
31st March, 2020	Profit 80,000
31st March, 2021	Profit 1,05,000 (after considering abnormal loss of (41,500)
31st March, 2022	Loss 20,000 (after considering abnormal gain of (40,000)
31st March, 2023	Profit 1,80,000
31st March, 2024	Profit 2,00,000

Books of Accounts of the firm revealed that:

1. Closing Stock as on 31st March, 2020 was overvalued by ₹ 40,000.
2. Repairs to Machinery ₹ 60,000 were wrongly debited to Machinery Account on 1st July, 2022. Depreciation was charged on Machinery @ 20% p.a. on diminishing balance method.

Hint: Weighted Profit for the year ended 31st March 2023 ₹ 5,16,000 and 2024 ₹ 10,51,000.

Answer 1

Calculation of profits of the firm for the purpose of goodwill:

2020 = 80,000 − 40,000

= ₹ 40,000

2021 = 1,05,000 + 41,500 + 40,000

= ₹ 1,86,500

2022 = (20,000) − 40,000

= ₹ (60,000)

2023 = `1,80,000 − 60,000 + (60,000 xx 20/100 xx 9/12)`

= 1,80,000 − 60,000 + 9,000

= ₹ 1,29,000

2024 = `2,00,000 + (60,000 - 9,000) xx 20/100`

= `2,00,000 + 51,000 xx 20/100`

= 2,00,000 + 10,200

= ₹ 2,10,200

Calculation of Weighted Average Profit of the firm:

Year	Profits (₹)	Weights	Weighted Profits (₹)
2020	40,000	1	40,000
2021	1,86,500	2	3,73,000
2022	(60,000)	3	(1,80,000)
2023	1,29,000	4	5,16,000
2024	2,10,200	5	10,51,000
Total		15	18,00,000

Weighted Average Profit of 5 years = `"Sum of Weighted Profits of 5 Years"/"Sum of Weights"`

= `(18,00,000)/15`

= ₹ 1,20,000

Calculation of goodwill of the firm:

Goodwill = Weighted Average Profit of 5 years × 3 years of purchase

= 1,20,000 × 3

= ₹ 3,60,000