Question

Manbir and Nimrat are partners and they admit Anahat into partnership. It was agreed to value goodwill at three years' purchase on Weighted Average Profit Method taking profits of last five years. Weights assigned to each year as 1, 2, 3, 4 and 5 respectively to profits for the year ended 31st March, 2015 to 2019. The profits for these years were: ₹ 70,000, ₹ 1,40,000, ₹ 1,00,000, ₹ 1,60,000 and ₹ 1,65,000 respectively.
Scrutiny of books of account revealed following information:
(i) There was an abnormal loss of ₹ 20,000 in the year ended 31st March, 2015.
(ii) There was an abnormal gain (profit) of ₹ 30,000 in the year ended 31st March, 2016.
(iii) Closing Stock as on 31st March, 2018 was overvalued by ₹ 10,000.
Calculate the value of goodwill.

Answer 1

$\begin{array}{l}\text{Goodwill}=\text{Weighted Average Profit}\times \text{No. of years' Purchase}\\ =1,39,000\times 3=\text{₹ 4,17,000}\end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits:

Year	Profit/(Loss) (₹)	Adjustment	Normal Profit (₹)
31 March, 2015	70,000	20,000	90,000
31 March, 2016	1,40,000	(30,000)	1,10,000
31 March, 2017	1,00,000	-	1,00,000
31 March, 2018	1,60,000	(10,000)	1,50,000
31 March, 2019	1,65,000	10,000	1,75,000

WN: 2 Calculations of Weighted Average Profits:

Year	Normal Profit	Weight	Product
31 March, 2015	90,000	1	90,000
31 March, 2016	1,10,000	2	2,20,000
31 March, 2017	1,00,000	3	3,00,000
31 March, 2018	1,50,000	4	6,00,000
31 March, 2019	1,75,000	5	8,75,000
Total		15	20,85,000

$\begin{array}{l}\text{Weighted Average Profit}=\frac{\text{Total of Profit Product}}{\text{Total of\hspace{0.17em}Weights}}\\ =\frac{20,85,000}{15}=₹\text{1,39,000}\end{array}$