Question

The net profits after tax of NZ & Co. for the past $3$ years are as follows.

Year	Profit
$2010-2011$	$20,000$
$2011-2012$	$2,61,000$
$2012-2013$	$3,12,000$

Closing stock for $2011-2012$ and $2012-2013$ includes the defective items of Rs. $22,000$ and Rs. $62,000$ respectively which were considered as having no market value. Calculate average profit for goodwill.

• A. Rs. $2,37,000$
• B. Rs. $1,77,000$
• C. Rs. $1,37,000$
• D. Rs. $1,73,000$

Answer 1

Answer: (B)

Rs. $1,77,000$

Defective items should be deducted from respective profits to arrive at a correct net profit.

Since Closing Stock for 2011-12 includes defective items of $Rs.22,000$, this shall have an impact in not only 2011-12 profits but also 2012-13 profits.

Therefore, re-calculation net profits for all the years:

1.Year 2010-11: $Rs.20,000$-no adjustment= $Rs.20,000$

2.Year 2011-12: $2,61,000$-$Rs.22,000$=$Rs.2,39,000$

3.Year 2012-13: $3,12,000$+$Rs.22,000$-$Rs.62,000$=$2,72,000$

Average profit: $Rs.20,000$+$Rs.2,39,000$+$Rs.2,72,000$=$Rs.5,31,000$ /$3$=$Rs.1,77,000$