Question 19 Chapter 3 of +2-A
19. Mahesh and Suresh are partners and they admit Naresh into partnership. They agreed to value goodwill at three years' purchase on the 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 |
| Profit/(Loss) | 20,000 | 24,000 | 30,000 | 25,000 | 18,000 |
Scrutiny of books of account revealed the following:
| Particulars / Year Ended |
31st March 2015 | 31st March 2016 |
31st March 2017 |
31st March 2018 |
31st March 2019 |
|---|---|---|---|---|---|
| Profit/(Loss) | 1,25,000 | 1,40,000 | 1,20,000 | 55,000 | 2,57,000 |
| Add: Repairs on new machine wrongly Debited | 1,00,000 | ||||
| Less: Depreciation @10% W.D.V | - 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 |
| Adjusted Profits/(Loss) | 85,000 | 1,00,000 | 80,000 | 1,50,000 | 1,50,000 |
| Year |
Adjusted Profit A |
Weight |
Product (E = C * D) |
|---|---|---|---|
| 31st March 2015 | 85,000 | 1 | 85,000 |
| 31st March 2016 | 1,00,000 | 2 | 2,00,000 |
| 31st March 2017 | 80,000 | 3 | 2,40,000 |
| 31st March, 2018 | 1,50,000 | 4 | 6,00,000 |
| 31st March, 2019 | 1,50,000 | 5 | 7,50,000 |
| Total | 15 | 18,75,000 | |
|
Average Profit |
= | Total Profit for past given years |
| Number of years |
| = | 18,75,000 |
| 15 | |
| = | 1,25,000 |
Number of years’ purchase = 4
| Goodwill | = | Weighted Average Profit X Number of years’ purchase |
| Goodwill | = | 1,25,000 X 3 |
| Goodwill | = | 3,75,000 |
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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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