Calculate Goodwill Of a Firm On the Basis of Three Years' Purchase Of the Weighted Average Profit of the Last Four Years
Calculate Goodwill Of a Firm On the Basis of Three Years' Purchase Of the Weighted Average Profit of the Last Four Years
Calculate goodwill of a firm on the basis of three years' purchase of the Weighted Average Profit of the last four years. The profits of the last four financial years ended 31st March, were: 2016 −₹ 25,000; 2017 −₹ 27,000; 2018 −₹ 46,900 and 2019 −₹ 53,810. The weights assigned to each year are: 2016 − 1; 2017 − 2; 2018 − 3; 2019 − 4. You are supplied the following information:(i) On 1st April, 2016, a major plant repair was undertaken for ₹ 10,000 which was charged to revenue. The said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% on Reducing Balance Method.(ii) The Closing Stock for the years ended 31st March, 2017 and 2018 were overvalued by₹ 1,000 and ₹ 2,000 respectively.(iii) To cover management cost an annual charge of ₹ 5,000 should be made for the purpose of goodwill valuation.
Weighted Average Profits = `"Total of Weighted Profits"/"Total Weights"`
= Rs. `\frac{4,00,000}{10}`
= Rs. 40,000
Goodwill = Average Profits of last years `\times` No. of years Purchase
Goodwill = Rs. 40,000 `\times` 3
= Rs. 1,20,000.
Particulars | 31st Mar., 2016 | 31st Mar., 2017 | 31st Mar., 2018 | 31st Mar., 2019 |
Profit | 25,000 | 27,000 | 46,900 | 53,810 |
Add: Repairs to Plant Capitalised | 10,000 | |||
Less: Depreciation @10% W.D.V | 1,000 | 900 | 810 | |
Less: Overvaluation of Closing Stock | 1,000 | 2,000 | ||
Add: Overvaluation of Opening Stock | 1,000 | 2,000 | ||
Less: Annual Charge | 5,000 | 5,000 | 5,000 | 5,000 |
Normal Profit/Loss | 20,000 | 30,000 | 40,000 | 50,000 |
Year | Normal Profits | Weights | Weighted Profits |
31st March, 2016 | 20,000 | 1 | 20,000 |
31st March, 2017 | 30,000 | 2 | 60,000 |
31st March, 2018 | 40,000 | 3 | 1,20,000 |
31st March, 2019 | 50,000 | 4 | 2,00,000 |
Total | 10 | 4,00,000 |
Weighted Average Profits = `"Total of Weighted Profits"/"Total Weights"`
= Rs. `\frac{4,00,000}{10}`
= Rs. 40,000
Goodwill = Average Profits of last years `\times` No. of years Purchase
Goodwill = Rs. 40,000 `\times` 3
= Rs. 1,20,000.
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