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.

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.

Chapter-3 Goodwill: Nature and Valuation-TS.Grewal

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