Page No 3.31:
Question 16:
Calculate goodwill of a firm on the basis of three years' purchase of the
Weighted Average Profit of the last four years. The profits of the last four
financial years ended 31st March, were: 2016 − ` 25,000; 2017 − ` 27,000; 2018 − ` 46,900 and 2019 − ` 53,810. The weights assigned to
each year are: 2016 − 1; 2017 − 2; 2018 − 3; 2019 − 4.
You are supplied the following information:
(i) On 1st April, 2016, a major plant repair was
undertaken for ` 10,000
which was charged to revenue. The said sum is to be capitalised
for goodwill calculation subject to adjustment of depreciation of 10% on
Reducing Balance Method.
(ii) The Closing Stock for the years ended 31st March, 2017 and 2018 were
overvalued by
` 1,000 and
` 2,000 respectively.
(iii) To cover management cost an annual charge of ` 5,000 should
be made for the purpose of goodwill valuation.
Answer:
Particulars |
Year |
31st Mar., 2016 |
31st Mar., 2017 |
31st Mar., 2018 |
31st Mar., 2019 |
Profit |
25,000 |
27,000 |
46,900 |
53,810 |
|
Add: Repairs to Plant Capitalised |
|
10,000 |
|
|
|
Less: Depreciation @10% W.D.V |
|
1,000 |
900 |
810 |
|
Less: Overvaluation of Closing Stock |
|
1,000 |
2,000 |
|
|
Add: Overvaluation of Opening Stock |
|
|
1,000 |
2,000 |
|
Less: Annual Charge |
5,000 |
5,000 |
5,000 |
5,000 |
|
Normal Profit/Loss |
20,000 |
30,000 |
40,000 |
50,000 |
|
|
|
|
|
|
Year |
Normal Profits ( `) |
Weights |
Weighted Profits ( `) |
31st March, 2016 |
20,000 |
1 |
20,000 |
31st March, 2017 |
30,000 |
2 |
60,000 |
31st March, 2018 |
40,000 |
3 |
1,20,000 |
31st March, 2019 |
50,000 |
4 |
2,00,000 |
Total |
10 |
4,00,000 |
Weighted Average Profits=Total of Weighted ProfitsTotal Weights= `4,00,00010= `40,000
Goodwill=Weighted Average Profits × No. of years of Purchase= `(40,000×3)= `1,20,000
Page No 3.31:
Question 17:
Dinesh and Mahesh are partners sharing profits and
losses in the ratio of 3 : 2. They admit Ramesh into partnership for 1/4th share in profits. Ramesh brings in his share of goodwill in cash. Goodwill
for this purpose shall be calculated at two years' purchase of the weighted
average normal profit of past three years. Weights being
assigned to each year 2017−1; 2018−2 and 2019−3.
Profits of the last three years were:
2017 − Profit `
50,000 (including profits on sale of assets
` 5,000).
2018 − Loss
` 20,000 (including loss by fire ` 35,000).
2019 − Profit
` 70,000 (including insurance claim received ` 18,000 and interest on investments
and dividend received `
8,000).
Calculate the value of goodwill. Also, calculate the goodwill brought in by Ramesh.
Answer:
Normal Profits for the year
2017=Total Profits-Profit on Sale of Assets= `(50,000-5,000)= `45,000
Normal Profits for the year 2018=Loss by Fire - Total Loss= `(35,000 - 20,000)= `15,000
Normal Profits for the year
2019=Total Profit-Insurance Claim Received - Dividend Received= `(70,000-18,000-8,000)= `44,000
Year |
Normal Profits ( `) |
Weights |
Weighted Profits ( `) |
2017 |
45,000 |
1 |
45,000 |
2018 |
15,000 |
2 |
30,000 |
2019 |
44,000 |
3 |
1,32,000 |
Total |
6 |
2,07,000 |
Weighted Average Profits=Total of Weighted ProfitsToatal of Weights= `2,07,0006= `34,500
Goodwill=Weighted Average Profits × No. of years of Purchase= `(34,500×2)= `69,000
Ramesh's Share of Goodwill= `69,000×14= `17,250
Page No 3.31:
Question 18:
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:
Goodwill=Weighted Average Profit×No. of years' Purchase
Goodwill
=1,39,000×3= ` 4,17,000
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 |
Weighted Average Profit=Total of Profit ProductTotal of Weights
Weighted Average Profit =20,85,00015= ` 1,39,000
Page No 3.31:
Question 19:
Mahesh and Suresh are partners and they admit Naresh into partnership. They agreed to value goodwill at three years' purchase on Weighted Average Profit Method taking profits for the last five years. They assigned weights from 1 to 5 beginning from the earliest year and onwards. The profits for the last five years were as follows:
Year Ended |
31st March, 2015 |
31st March, 2016 |
31st March, 2017 |
31st March, 2018 |
31st March, 2019 |
Profits (
`) |
1,25,000 |
1,40,000 |
1,20,000 |
55,000 |
2,57,000 |
Scrutiny
of books of account revealed the following:
(i) A second-hand machine was purchased for ‹ ` 5,00,000 on 1st July, 2017
and `
1,00,000 were spent to make it operational. ` 1,00,000
were wrongly debited to Repairs Account. Machinery is depreciated @ 20%
p.a. on Written Down Value Method.
(ii) Closing Stock as on 31st March, 2018 was undervalued by ` 50,000.
(iii) Remuneration to partners was to be considered as charge against profit
and remuneration of
` 20,000 p.a. for each partner was considered appropriate.
Calculate the value of goodwill.
Answer:
Particulars |
Year |
31st Mar., 2015( `) |
31st Mar., 2016( `) |
31st Mar., 2017( `) |
31st Mar., 2018( `) |
31st Mar., 2019( `) |
Profit |
1,25,000 |
1,40,000 |
1,20,000 |
55,000 |
2,57,000 |
|
Add: Repairs on new machine wrongly |
|
|
|
1,00,000 |
|
|
Debited |
|
|
|
|
|
|
Less: Depreciation on Machine (20% p.a.) |
|
|
|
15,000 |
17,000 |
|
Add: Undervaluation of Closing Stock |
|
|
|
50,000 |
|
|
Less: Undervaluation of Opening Stock |
|
|
|
|
50,000 |
|
Less: Remuneration to Partners |
40,000 |
40,000 |
40,000 |
40,000 |
40,000 |
|
Normal Profit/Loss |
85,000 |
1,00,000 |
80,000 |
1,50,000 |
1,50,000 |
|
|
|
|
|
|
|
Year |
Normal Profits ( `) |
Weights |
Weighted Profits ( `) |
31st Mar., 2015 |
85,000 |
1 |
85,000 |
31st Mar., 2016 |
1,00,000 |
2 |
2,00,000 |
31st Mar., 2017 |
80,000 |
3 |
2,40,000 |
31st Mar., 2018 |
1,50,000 |
4 |
6,00,000 |
31st Mar., 2019 |
1,50,000 |
5 |
7,50,000 |
Total |
15 |
18,75,000 |
Weighted Average Profits=Total of Weighted ProfitsTotal of Weights= `18,75,00015= `1,25,000
Goodwill=Weightes Average Profits × No. of years of purchase= `(1,25,000×3)= `3,75,000
Page No 3.32:
Question 20:
Calculate the goodwill of a firm on the basis of three years' purchase of the weighted average profit of the last four years. The appropriate weights to be used and profits are:
Year |
2015-16 |
2016-17 |
2017-18 |
2018-19 |
Profits (
`) |
1,01,000 |
1,24,000 |
1,00,000 |
1,40,000 |
Weights |
1 |
2 |
3 |
4 |
On a
scrutiny of the accounts, the following matters are revealed:
(i) On 1st December, 2017, a major repair was made in
respect of the plant incurring ` 30,000 which was charged to revenue. The said sum is agreed
to be capitalised for goodwill calculation subject to
adjustment of depreciation of 10% p.a. on Reducing Balance Method.
(ii) The closing stock for the year 2016-17 was overvalued by
` 12,000.
(iii) To cover management cost, an annual charge of `
24,000 should be made for the purpose of goodwill valuation.
(iv) On 1st April, 2016, a machine having a book value of ` 10,000 was sold for ` 11,000 but the proceeds were wrongly credited to Profit and
Loss Account. No effect has been given to rectify the same. Depreciation is
charged on machine @ 10% p.a. on reducing balance method.
Answer:
Particulars |
2015-16 |
2016-17 |
2017-18 |
2018-19 |
Profits |
1,01,000 |
1,24,000 |
1,00,000 |
1,40,000 |
Repair
Capitalised |
|
|
+30,000 |
|
Depreciation |
|
|
(1,000) |
(2,900) |
Overvaluation
of Closing Stock |
|
(12,000) |
12,000 |
|
Management
Cost |
(24,000) |
(24,000) |
(24,000) |
(24,000) |
Sale
Proceeds |
|
(10,000) |
|
|
Adjusted
Profits |
77,000 |
78,000 |
1,17,900 |
1,13,910 |
Weights |
1 |
2 |
3 |
4 |
Product |
77,000 |
1,56,0000 |
3,53,700 |
4,55,640 |
Working Notes:
Goodwill = Weighted Average profit × number of purchases years’
Weighted Average profit = total profit of past given years/ Total of Weighted
Weighted Average profit =77,000+1,56,0000+3,53,700+4,55,640/10=1,04,234
Number of years’ purchase = 3
Goodwill= Weighted Average profit × no. of purchases years’
Goodwill= 1,04,234× 3=3,12,702
Note 1: Depreciation on `
30,000 machinery is charged for only 4 months in the year 2016-17.
Note 2: Sale proceeds wrongly credited in 2015-16 have been deducted after adjusting for profit of ` 1,000. No depreciation is charged, since date of sale is not given (assumed that the machinery is sold at the end of the year).
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