Question

Calculate the goodwill of a firm on the basis of three years' purchase of the weighted average profit of the last four years. The appropriate weights to be used and profits are:

Year	2014-15	2015-16	2016-17	2017-18
Profit (₹)	1,01,000	1,24,000	1,00,000	1,40,000
Weight	1	2	3	4

On a scrutiny of the accounts, the following matters are revealed:
(i) On 1st December, 2016, a major repair was made in respect of the plant incurring ₹ 30,000 which was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.
(ii) The closing stock for the year 2015-16 was overvalued by ₹ 12,000.
(iii) To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.
(iv) In 2015-16, a machine having a book value of ₹ 10,000 was sold for ₹ 11,000 but the proceeds were wrongly credited to Profit and Loss Account. No effect has been given to rectify the same. Depreciation is charged on machine @ 10% p.a. on reducing balance method.

Answer 1

Particulars	2014-15	2015-16	2016-17	2017-18
Profits	1,01,000	1,24,000	1,00,000	1,40,000
Repair Capitalised			+30,000
Depreciation			(1,000)	(2,900)
Overvaluation of Closing Stock		(12,000)	12,000
Management Cost	(24,000)	(24,000)	(24,000)	(24,000)
Sale Proceeds Wrong Depreciation		(10,000)	900	810
Adjusted Profits	77,000	78,000	1,17,900	1,13,910
Weights	1	2	3	4
Product	77,000	1,56,0000	3,53,700	4,55,640

Working Notes:

$$\begin{gathered} \mathrm{Goodwill}=\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}\times \mathrm{Number}\mathrm{of}\mathrm{Years}\text{'}\mathrm{Purchase} \\ \begin{array}{c}\begin{array}{rcl}\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}& =& \frac{\mathrm{Total}\mathrm{of}\mathrm{Product}}{\mathrm{Total}\mathrm{of}\mathrm{Weights}}\\ & =& \frac{77,000+1,56,000+3,53,700+4,55,640}{10}=\mathrm{Rs}1,04,234\end{array}\end{array} \\ \mathrm{Goodwill}=1,04,234\times 3=\mathrm{Rs}3,12,702 \end{gathered}$$

Note 1: Depreciation on Rs 30,000 machinery is charged for only 4 months in the year 2016-17.

Note 2: Sale proceeds wrongly credited in 2015-16 have been deducted after adjusting for profit of Rs 1,000. No depreciation is charged, since date of sale is not given (assumed that the machinery is sold at the end of the year).