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.
Calculation for Normal Profit/Loss
Particulars
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 debited
1,00,000
Less: Depreciation on Machine
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
Calculation for Weighted Profits
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. `frac\{18,75,000}{15}` = Rs. 1,25,000
Goodwill = Average Profits of last years x No. of years Purchase
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