Question 16 Chapter 3 of +2-A

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 capitalized 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

The solution of Question 16 Chapter 3 of +2-A

:

 Particulars / Year Ended 31st March 2016 31st March 2017 31st March 2018 31st March 2019 Profit/(Loss) 25,000 27,000 46,900 53,810 Add: Capitalized the number of Repairs of Plant 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: Remuneration to Partners – 5,000 – 5,000 – 5,000 – 5,000 Adjusted Profits/(Loss) 20,000 30,000 40,000 50,000

 Year Adjusted ProfitA WeightD Product(E = C * D) 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 1,92,000

 Average Profit = Total Profit for past given years Number of years

 = 4,00,000 10 = 40,000

Number of years’ purchase = 4

 Goodwill = Weighted Average Profit X Number of years’ purchase Goodwill = 40,000X 3 Goodwill = 1,20,000

### T.S. Grewal’s Double Entry Book Keeping +2 (Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms)

• Chapter No. 1 – Financial Statement of Not-For-Profit Organisations
• Chapter No. 2 – Accounting for Partnership Firms – Fundamentals
• Chapter No. 3 – Goodwill: Nature and Valuation
• Chapter No. 4 – Change in Profit-Sharing Ratio Among the Existing Partners
• Chapter No. 5 – Admission of a Partner
• Chapter No. 6 – Retirement/Death of a Partner
• Chapter No. 7 – Dissolution of a Partnership Firm

### T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)

• Chapter No. 1 – Financial Statements of a Company
• Chapter No. 2 – Financial Statement Analysis
• Chapter No. 3 – Tools of Financial Statement Analysis – Comparative Statements and Common- Size Statements
• Chapter No. 4 – Accounting Ratios
• Chapter No. 5 – Cash Flow Statement