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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.

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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?
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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 19 | Page 31
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