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Calculate the Goodwill - Accountancy

Sum

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:
(i) On 1st 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 Reducing Balance Method.
(ii) The closing stock for the year 2016-17 was overvalued by ₹ 12,000.
(iii) To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.
(iv) 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 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.

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Solution

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)

12,000

 

Management Cost

(24,000)

(24,000)

(24,000)

(24,000)

Sale Proceeds
Wrong Depreciation

 

(10,000)


900


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:
Goodwill equals Weighted space Average space Profits cross times Number space of space Years apostrophe space Purchase table row cell table attributes columnalign right center left columnspacing 0px end attributes row cell Weighted space Average space Profits end cell equals cell fraction numerator Total space of space Product over denominator Total space of space Weights end fraction end cell row blank equals cell fraction numerator 77 comma 000 plus 1 comma 56 comma 000 plus 3 comma 53 comma 700 plus 4 comma 55 comma 640 over denominator 10 end fraction equals ₹ space 1 comma 04 comma 234 end cell end table end cell end table Goodwill equals 1 comma 04 comma 234 cross times 3 equals ₹ space 3 comma 12 comma 702

Note 1: Depreciation on ₹ 30,000 machinery is charged for only 4 months in the year 2016-17.

Note 2: Sale proceeds wrongly credited in 2015-16 have been deducted after adjusting for profit of ₹ 1,000. No depreciation is charged, since date of sale is not given (assumed that the machinery is sold at the end of the year).

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APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 3 Goodwill: Nature and Valuation
Exercise | Q 20 | Page 32
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