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Question 08 Chapter 3 of +2-Part-1
8. (Weighted Average Profit Method) The profits of Ram Mills for the last five years were as under:
| Year | Profit/Loss |
| 2015 | 10,000 |
| 2016 | 20,000 |
| 2017 | 30,000 |
| 2018 | 40,000 |
| 2019 | 60,000 |
Calculate the value of goodwill is 2 years purchase of average weighted profits. The weights are 1,2,3,4 and 5 in the year of 2015, 2016, 2017, 2018 and 2019.
Calculation of Weighted Average Profit
| Year |
Adjusted Profit (A) | Weight (D) |
Product (E = C X D) |
|---|---|---|---|
| 2015 | 10,000 | 1 | 10,000 |
| 2016 | 20,000 | 2 | 40,000 |
| 2017 | 30,000 | 3 | 90,000 |
| 2018 | 40,000 | 4 | 1,60,000 |
| 2019 | 60,000 | 5 | 3,00,000 |
| Total | 15 | 6,00,000 | |
| Weighted Average Profit | = | Total weighted Profit |
| Total weight | ||
| = | 6,00,000 | |
| 15 | ||
| = | 40,000 |
| Number of years’ purchase | = | 2 |
| Goodwill | = | Weighted Average Profit X Number of years’ purchase |
| Goodwill | = | 40,000 X 2 |
| Goodwill | = | 80,000 |
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Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
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