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:

1. On 1^st 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.
2. The closing stock for the year 2016-17 was overvalued by ₹ 12,000.
3. To cover management costs, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.
4. 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.

Answer 1

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