Question

2
0.9. Calculate the value of goodwill on the basis of three year's purchase of the
weighted average profits of the last five years. Profits to be weighted 1, 2, 3, 4 and 5,
the greatest weightage to be given to last year. Profits of the last five years were :
Year ended
31st March, 2015: Profit 80,000
2016: Profit 1,05,000 (after considering abnormal loss
of 41,500)
2017 : Loss
(after considering abnormal gain
of 40,000)
2018: Profit 1,80,000
2019: Profit 2,00,000
Books of Accounts of the firm revealed that:
(i) Closing Stock as on 31st March, 2015 was overvalued by 40,000.
(ii) Repairs to Machinery 60,000 were wrongly debited to Machinery Account
on 1st July, 2017. Depreciation was charged on Machinery @ 20% p.a. on
5
diminishing balance method.
[Ans. Value of Goodwill 33,60,000.)
5,16,000 and 2019
​

Answer 1

Answer:

3,60,000

Explanation:

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Answer 2

Concept:

Weighted Average: The weighted average approach assigns weights to each year's profits, giving the most weight to the most recent years. The weighted average profit is multiplied by the number of years since the purchase to determine goodwill.

Given:

• Profit of last five years.
• Adjustments in profits
• Years of purchase is 3

Find : The value of Goodwill

Solution:

1. Adjusted profits of

• 2015 = Profits - overvalue of closing stock = 80,000 - 40,000 = 40,000
• 2016 = Profits + Abnormal Loss + Undervalue of Opening stock = 1,05,000 + 41,500 + 40,000 = 1,86,500
• 2017 = Profits - Abnormal Gain = (20,000) - 40,000 = (60,000)
• 2018 = Profits - Repairs + Depriciation = 1,80,000 - 60,000 + 9,000   = 1,29,000
• 2019 = Profits + depriciation = 2,00,000+10,200 = 2,10,200

     2. Calculation of Weighted Profits

Weighted Profits = Adjusted Profits x Weights

• 2015= 40,000 x 1 = 40,000
• 2016=1,86,500 x 2 = 5,73,000
• 2017=(60,000) x 3 = (1,80,000)
• 2018=1,29,000 x 4 = 5,16,000
• 2019=2,10,200 x 5 = 10,51,000

         Total             =  18,00,000

      3. Weighted Avg Profit = Total weighted profits / total weights

          Weighted Avg Profit = 18,00,000 / 15 = 1,20,000

      4. Goodwill = Weighted Avg Profits x Years Of purchase

          Goodwill = 1,20,000 x 3 = 3,60,000

Hence, the Goodwill is Rs. 3,60,000

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