Question

Calculate the goodwill of a firm on the basis of three years purchase of the weighted average profit of the last four years. The appropriate weights to be used and profits are:
On a scrutiny of the accounts, the following matters are revealed:
(i) On 1st December, 2016, a major repair was made in respect of the plant incurring ₹ 30,000 which was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.
(ii) The closing stock for the year 2015-16 was overvalued by ₹ 12,000.
(iii) To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.
(iv) In 2015-16, a machine having a book value of ₹ 10,000 was sold for ₹ 11,000 but the proceeds were wrongly credited to Profit and Loss Account. No effect has been given to rectify the same. Depreciation is charged on machine @ 10% p.a. on reducing balance method.

Answer 1

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made in respect of the plant incurring ₹ 30,000 which was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.

(ii) The closing stock for the year 2015-16 was overvalued by ₹ 12,000.

(iii) To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.

(iv

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Answer 2

Explanation:

Working Notes:

Goodwill = Weighted Average Profits x Number of Years' Purchase weighted Average Profits = $\frac{Total of Product}{Total of Weights}$

= $\frac{77,000+1,56,000+3,51,000+4,52,400}{10}=1,03,640$

Goodwill = $1,03,640 \times 3= 3,10,9,20$

Note: 1 . Depreciation on Rs.30, 000 machinery is charged for only 4 months in the year 2016-17.

Note 2 . Sale proceeds wrongly credited in 2015 -16 have been deducted after adjusting for profit of Rs.1.000. No depreciation is charged, since date of sale of is not given (assumed that the machinery is sold a the end of the year).