Question 18 Chapter 3 of +2-A
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 the 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 the following information:
There was an abnormal loss of 20,000 in the year ended 31st March 2015.
There was an abnormal gain profit of 30,000 in the year ended 31st March 2016.
Closing Stock as on 31st March 2018 was overvalued by 10,000.
Calculate the value of goodwill.
The solution of Question 18 Chapter 3 of +2-A:
| Year |
Adjusted Profit A |
Weight |
Product (E = C * D) |
| 31st March 2015 | 90,000 | 1 | 90,000 |
| 31st March 2016 | 1,10,000 | 2 | 2,20,000 |
| 31st March 2017 | 1,00,000 | 3 | 3,00,000 |
| 31st March,2018 | 1,50,000 | 4 | 6,00,000 |
| 31st March,2019 | 1,75,000 | 5 | 8,75,000 |
| Total | 15 | 20,85,000 | |
Note: – For calculation of Adjusted profit see working note at the end of the question.
|
Average Profit |
= | Total Profit for past given years |
| Number of years |
| = | 20,85,000 | |
| 15 | ||
| = | 1,39,000 |
Number of years’ purchase = 3
| Goodwill | = | Weighted Average Profit X Number of years’ purchase |
| Goodwill | = | 1,39,000 X 3 |
| Goodwill | = | 4,17,000 |
Working Note: –
*1 Calculation of Adjusted Profit
| Adjusted profit for the year ended 31st March 2015 | = | Total Profit + Abnormal loss |
| = | 70,000 + 20,000 | |
| = | 90,000 | |
| Adjusted profit for the year ended 31st March 2016 | = | Total Profit – Abnormal gain |
| = | 1,40,000 – 30,000 | |
| = | 1,10,000 | |
| Adjusted profit for the year ended 31st March 2018 | = | Total Profit – Overvalued Closing Stock |
| = | 1,60,000 – 10,000 | |
| = | 1,50,000 | |
| Adjusted profit for the year ended 31st March 2019 | = | Total Profit + Overvalued Opening Stock |
| = | 1,65,000 – 10,000 | |
| = | 1,75,000 |
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. 8 – Company Accounts – Accounting for Share Capital
- Chapter No. 9 – Company Accounts – Issue of Debentures
- Chapter No. 10 – Redemption of Debentures
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
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