Question 19 Chapter 3 of +2-A
Table of Contents
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:
- 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.
- Closing Stock as on 31st March 2018 was undervalued by 50,000.
- Remuneration to partners was to be considered as a charge against profit and remuneration of 20,000 p.a. for each partner was considered appropriate.
Calculate the value of goodwill.
The solution of Question 19 Chapter 3 of +2-A:
| 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 |
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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