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 2014 to 2018. The profits for these years were Rs.70,000, Rs 1,40,000, Rs.1,00,000, Rs. 1,60,000 and Rs. 1,65,000 respectively.
Scrutiny of books of account revealed following information:
(i) There was an abnormal loss of Rs.20,000 in the year ended 31st March,2014.
(ii) There was an abnormal gain (profit) of Rs.30,000 in the year ended 31st March ,2015.
(iii) Closing stock as on 31st March, 2017 was over valued by Rs.10,000.
Calculate the value of goodwill.

Answer 1

Step - 1 Adjustment of profit

Year Profit

2014 70,000 + 20,000 (Abnormal Loss) = 90,000

2015 1,40,000 - 30,000 (Abnormal Profit) = 1,10,000

2016 1,00,000 = 1,00,000

2017 1,60,000 - 10,000 (treatment of stock) = 1,50,000

2018 1,65,000 + 10,000 (treatment of stock) = 1,75,000

Step - 2 Calculation of product

Year	Profit	Weight	Product
2014 2015 2016 2017 2018	90,000 1,10,000 1,00,000 1,50,000 1,75,000	1 2 3 4 5	90,000 2,20,000 3,00,000 6,00,000 8,75,000
		15	20,85,000

weighed Avg. Profit = $\frac{20,85,000}{15}=1,39,000$

Step - 3 Goodwill = weighted Avg Profit $\times$ No of years

$=1,39,000\times 3$

$=4,17,000$