# Volume-1 | Chapter- 3 | | Question: 16 to 20 | Ts grewal solution 2019-20 | Class-12th

#### 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.

 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

#### 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.

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

#### 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.

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

#### 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.

 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

#### 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.

 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 Wrong Depreciation (10,000) 900 810 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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