Question

Calculate the value of goodwill of a firm on the basis of three year's purchase of the weighted average profit
of the last four years. The profits of last four years were :
2015 RS.5,000
2016 RS.5,200
2017 RS.9,300
2018 RS.10,700


During 2015 there was abnormal loss of 7 1,000 due to theft and in 2018 there was a profit from sale ofland
amounting to 7 4,000. In 2016 closing stock was over valued by rs.1,200. The weights are 1, 2, 3 and 4 for the year 2015, 2016, 2017 and 7 2018 respectively.
(Ans. 21,690] please explain....​

Answer 1

Answer:

Goodwill = Rs. 21,990

Explanation:

For 2015, Profit = Rs. 5,000 + Adnormal Loss of Rs. 1,000 = Normal Profit = Rs. 6,000.

Multiplying it with the wight of 2015, ie 1, we get 6,000*1 = Rs. 6,000.

For 2016, Profit = 5,200 + Overvaluation of Closing Stock Rs. 1,200 = Rs. 6,300.

Multiplying it with the weight, ie 2, we get 6,300*2 = Rs. 12,600.

For 2017, Profit = Rs. 9,300. No adjustments are to be made according to the question.

Multiplying it with the weight, ie 3, we get Rs. 9,300*3 = Rs. 27,900.

For 2018, Profit = Rs. 10,700 - Gain on Sale of Land Rs. 4,000 = Rs. 6,700.

Now, multiplying this by weight, ie 4, we get 6,700*4 = Rs. 26,800

Now we need to calculate the sum of each year's normal profit, multiplied by their respective weights, to calculated total weighted profit.

Total Weighted Profit, TWP = ∑(NP*wt.)

= 6,000 + 12,600 + 27,900 + 26,800

= Rs. 73,300

Now, we need to calculate weighted average profit, WAP.

$WAP = \dfrac{\text{TWP}}{\text{Sum of Weights}}$

Sum of weights = 1+2+3+4 = 10

Therefore, WAP = TWP/Sum of Wt.s = 73,300/10 = Rs. 7,330.

Number of years purchase given is 3 years.

So, to calculate goodwill, just multiple WAP by No. of yrs. purch..

Therefore, Goodwill = 7,330*3 = Rs. 21,990