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Question
Geet and Meet are partners in a firm. They admit Jeet into partnership for equal share. It was agreed that goodwill will be valued at three years' purchase of average profit of last five years. Profits for the last five years were:
| Year Ended | 31st March, 2015 | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 |
| Profits (₹) | 90,000 (Loss) |
1,60,000 | 1,50,000 | 65,000 | 1,77,000 |
Books of Account of the firm revealed that:
(i) The firm had gain (profit) of ₹ 50,000 from sale of machinery sold in the year ended 31st March, 2016. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of ₹ 20,000 incurred in the year ended 31st March, 2017 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2017 amounting to ₹ 1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.
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/Loss |
(90,000) |
1,60,000 |
1,50,000 |
65,000 |
1,77,000 |
|
|
Less: Gain on Sale of Machinery |
|
50,000 |
|
|
|
|
|
Add: Abnormal Loss |
|
|
20,000 |
|
|
|
|
Add: Overhaul of existing machinery |
|
|
|
|
|
|
|
Debited to Repairs A/c |
|
|
|
1,00,000 |
|
|
|
Less: Depreciation @20% p.a. |
|
|
|
15,000 |
17,000 |
|
|
Normal Profit/Loss |
(90,000) |
1,10,000 |
1,70,000 |
1,50,000 |
1,60,000 |
|
Average Profits = `("Normal Profit for the year ended 31st March,2015 to 31st March,2019"/5)`
= `([ -90,000 + 1,10,000 + 170,000 + 150,000 + 160,000 ]/5)`
= Rs. 1,00,000
Goodwill = Average Profits of last three years x No. of Years of Purchase
Goodwill = Rs.( 1,00,000 x 3) = Rs. 3,00,000
