Question

Q. 4. I purchased the business of Y from 1st April 2019 For this purpose goodwill
to be valued at 100% of the average annual profits of the last four years. The profits shown
by Y's business for the last four years were
Four ended
31st March, 2016 Profit 1,00,000 (after debiting loss of stock by fire
50.000)
2017 Loss 1.50.000 (includes voluntary retirement
compensation paid *80,000)
2018 Profit 1.50,000
2019 Profit 2,00,000
Verification of books of accounts revealed the following
During the year ended 31st March, 2017, a machine got destroyed in accident and
260.000 was written off as loss in Profit & Loss Account.
(i) On 1st July 2017. Two Computers costing 40,000 each were purchased and were
debited to Travelling Expenses Account on which depreciation is to be charged @
10% pa. on Straight Line Method.
Calculate the value of goodwill
​

Answer 1

Answer:

Answer

Correct option is

C

(I) & (II)

(I) A depreciation expense has a direct effect on the profit that appears on a company's income statement. The larger the depreciation expense in a given year, the lower the company's reported net income – its profit. However, because depreciation is a non-cash expense, the expense doesn't change the company's cash flow.

(II) Depreciation Expense reflects an allocation of an asset's original cost rather than an allocation based on the economic value that is being consumed. This is true because of the cost principle and the matching principle. An asset (such as a computer) may have a very long physical life.