# Calculate the Value of Goodwill. - Accountancy

Sum

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

Is there an error in this question or solution?

#### APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 3 Goodwill: Nature and Valuation
Exercise | Q 19 | Page 31