Question

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:
(i) 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 1

Particulars	Year	31st Mar., 2016	31st Mar., 2017	31st Mar., 2018	31st Mar., 2019
Profit		25,000	27,000	46,900	53,810
Add: Repairs to Plant Capitalised			10,000
Less: Depreciation @10% W.D.V			1,000	900	810
Less: Overvaluation of Closing Stock			1,000	2,000
Add: Overvaluation of Opening Stock				1,000	2,000
Less: Annual Charge		5,000	5,000	5,000	5,000
Normal Profit/Loss		20,000	30,000	40,000	50,000

​

Year	Normal Profits (₹)	Weights	Weighted Profits (₹)
31st March, 2016	20,000	1	20,000
31st March, 2017	30,000	2	60,000
31st March, 2018	40,000	3	1,20,000
31st March, 2019	50,000	4	2,00,000
Total		10	4,00,000

$$\begin{gathered} \mathrm{Weighted}\mathrm{Average}\mathrm{Profits}=\left(\frac{\mathrm{Total}\mathrm{of}\mathrm{Weighted}\mathrm{Profits}}{\mathrm{Total}\mathrm{Weights}}\right)=₹\left(\frac{4,00,000}{10}\right)=₹40,000 \\ \mathrm{Goodwill}=\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=₹(40,000\times 3)=₹1,20,000 \end{gathered}$$