Question

Ques. Following information is available about the business of a firm:
1. Profits: in 2013, Rs 40,000; in 2014, Rs 50,000; in 2015, Rs 60,000;
2. Non-recurring income of Rs 1,000 is included in the profits of 2014;
3. Profits of 2013 have been reduced by Rs 6,000 because goods were destroyed by fire;
4. Goods haven't been insured but it is thought to insure them in future. The insurance premium is estimated at Rs 400 per year;
5. Reasonable remuneration of the proprietor of business is Rs 6,000 per year, but is hasn't been taken into account for calculation of above mentioned profits;
6. Profits of 2015 include Rs 5,000 income on investment.
Goodwill is agreed to be valued at 2 year's purchase of weighted average profits of the past 3 years. The appropriate weights to be used are:
2013- 1
2014- 2
2015- 3
Calculate the value of goodwill.

Answer 1

Dear student,

CALCULATION OF ADJUSTED PROFIT

Particulars	2013 Rs	2014 Rs	2015 Rs
profits	40000	50000	60000
less: non recurring income		(1000)
add: loss by fire (abnormal loss)	6000
less: Insurance expenses	(400)	(400)	(400)
less: remuneration	(6000)	(6000)	(6000)
less: income from investment			(5000)
Adjusted profit	39600	42600	48600

CALCULATION OF WEIGHTED AVERAGE PROFITS

YEAR	PROFIT Rs	WEIGHT	PRODUCT
2013	39600	1	39600
2014	42600	2	85200
2015	48600	3	145800
		6	270600

weighted average profit= $\frac{270600}{6}=Rs45100$

goodwill at 2 year's purchase= $45100\times 2=Rs90,200$

Regards!!