Calculate the goodwill of firm on the basis of years purchase of the weighted average profit of the last four year. The appropriate weight to be used and profits are:
Year 2014-15 2015-16 2016-17 2017-18
Profit(Rs) $1, 01, 000$ $1, 24, 000$ $1, 00, 000$ $1, 40, 000$
Weight $1$ $2$ $3$ $4$
On a scrunity of the accounts, the following matters are revealed:
(i) On $1^{s t}$ December,2016 a major repair was made in respect of the plant incurring Rs. $30, 000$ which was charged to revenue. The said sum is agreed to be capitalised for 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 Rs. $12, 000$
(iii) To cover management cost, an annual charge of Rs. $24, 000$ should be made for the purpose of goodwill valuation.
(iv) On $1^{s t}$ April, 2015, a machine having a book value of Rs. $10, 000$ was sold for Rs. $11, 000$ but the proceeds were wrongly credited to Profit & Loss. Account. No affect has been given to rectify the same. Depreciation is charged on machine @ $10 %$ p.a. on reducing balance method.

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Solution

Here, we need to find out the goodwill on the basis of weighted average profit. But before finding out the weighted average profit, we need to make some adjustments to the profits of the previous and current year.

Year 2014-15 2015-16 2016-17 2017-18
Profits 1,01,000 1,24,000 1,00,000 1,40,000
Add:Major repairs 30,000
Less: Depreciation @ 10% ( 1,000) (2900) (2,610)
Less:Cl. stock (12,000)
Add:Op.stock 12,000
Less:Management Exp (24,000) (24,000) (24,000) (24,000)
Less: capital profit (1000)
Total 77,000 1,16,000 85,100 113390
Weights 1 2 3 4
Total 77,000 2,32,000 2,55,300 4,53,560

Weighted average profit = (77,000+2,32,000+2,55,300+4,53,560)/10
= 1,01786

Notes:- Major repairs to be capitalized in the year 2015-16. Depreciation for 4 months to be charged in the year 2015-16 and then full depreciation for the year 2016-17 and 2017-18.
Closing stock overvalued by 12,000,thus profit of 2015-16 to be reduced. Opening stock for the year 206-17 undervalued,hence profit to be increased.

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On a scrutiny of the accounts, the following matters are revealed:
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