Question

Munni Limited is to be absorbed by Heavy Limited. They agree to value goodwill attaching

to Munni Limited on the basis of three years purchase of the average annual super profits, the net

profits being averaged over five years, with due regard to necessary adjustments, if any, profits of

Munni Limited (before income-tax @ 55% on income) for the last five years are:

Year 2000 – Rs. 50,000 year 2001 –Rs, 65,000, year 2002 – Rs, 45,000, year 2003 – Rs, 55,000,

year 2005 – Rs, 75,000.Three directors of Munni Limited will be appointed to the Board of

Heavy Limited on absorption and it is considered that their services are worth Rs. 5,000 each p.

a. which have never been, charged against profit of Munni Limited. The average capital

employed during the period is Rs. 1,80,000 and the expected normal return form the particular

type of business carried on by Munni Limited is 5% p.a. Calculate the value of goodwill of

Munni Limited.​

Answer 1

Answer:

Weighted average profit method is used to evaluate the Goodwill when there is an increasing on decreasing trend in past year profits of the firm. In such situation, it is considered to be better to give a higher weightage to the profits to the recent years than those of the earlier years.