Chapter 3 . Goodwill: Nature and Valuation 3.31Weighted Average Profit Method when Past Adjustments are Made16. Calculate goodwill of a firm on the basis of three years' purchase of the Weighted Average Profit of the lastfour years. The profits of the last four financial years ended 31st March, were: 2016– 25,000; 2017-* 27,000:2018_46,900 and 2019- 53,810. The weights assigned to each year are: 2016-1; 2017-2; 2018-3;2019—4. You are supplied the following information:(1) On 1st April, 2016, a major plant repair was undertaken for 10,000 which was charged to revenue.Thesaid sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% onReducing Balance Method.(ii) The Closing Stock for the years ended 31st March, 2017 and 2018 were overvalued by * 1,000 and2,000 respectively.(iii) To cover management cost an annual charge of 5,000 should be made for the purpose of goodwillvaluation.[Ans.: Goodwill- 1,20,000.]
Answers
Answer:
Chapter 3 . Goodwill: Nature and Valuation 3.31
Weighted Average Profit Method when Past Adjustments are Made
16. Calculate goodwill of a firm on the basis of three years' purchase of the Weighted Average Profit of the last
four years. The profits of the last four financial years ended 31st March, were: 2016– 25,000; 2017-* 27,000:
2018_46,900 and 2019- 53,810. The weights assigned to each year are: 2016-1; 2017-2; 2018-3;
2019—4. You are supplied the following information:
(1) On 1st April, 2016, a major plant repair was undertaken for 10,000 which was charged to revenue.The
said sum is to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% on
Reducing Balance Method.
(ii) The Closing Stock for the years ended 31st March, 2017 and 2018 were overvalued by * 1,000 and
2,000 respectively.
(iii) To cover management cost an annual charge of 5,000 should be made for the purpose of goodwill
valuation.
Answer:
Goodwill = Average profit X number of years’ purchase
Average Profit = Total profit for past given years/numbers
= 12000+18000+16000+14000/4 = 60000/4
= Rs. 15000
Number of year’s purchase = 3
Therefore, Goodwill = 15000 X 3
= Rs. 45000
Goodwill is the estimation of the reputation of a firm worked after some time as for the normal future benefits well beyond the ordinary benefits. An entrenched firm wins a decent name in the market, constructs trust with the clients and furthermore has more business associations when contrasted with a recently set up business. Along these lines, the money related estimation of this favorable position that a purchaser is prepared to pay is named as Goodwill.