Question

Calculate goodwill of a firm on the basis of three year' purchase of the weighted average profits of
the last four years. The profit of the last four years were: 2003 Rs. 20,200; 2004 Rs. 24,800; 2005
Rs. 20,000 and 2006 Rs. 30,000. The weights assigned to each year are: 2003- 1; 2004- 2; 2005- 3
and 2006- 4. You are supplied the following information:
a) On September 1, 2005 a major plant repair was undertaken for Rs. 6,000, which was charged
to revenue. The said sum is to be capitalised for goodwill calculation subject to adjustment of
depreciation of 10% p.a. on reducing balance method.
b) The Closing Stock for the year 2004 was overvalued by Rs. 2,400.
c) To cover management cost an annual charge of Rs. 4,800 should be made for purpose of
goodwill valuation.

Answer 1

Actual Profits
2003: 20,200
2004: 24,800-2400=22,400
2005: 20,000+2400+6,000-200=28,200
2006: 30,000-580=29,420

Weighted Profits
20,200*1 +22,400*2+ 28,200*3+ 29420*4
=20,200+44,800+84,600+1,17,680
=2,67,280

Future Maintainable pofits
267280/10 - 4800
26728-4800
21972
Goodwill =21972*3
=65916