Question 20 Chapter 3 of +2-A
Table of Contents
20. 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 | 2015-16 | 2016-17 | 2017-18 | 2018-19 |
| Profit | 1,01,000 | 1,24,000 | 1,00,000 | 1,40,000 |
| Weights | 1 | 2 | 3 | 4 |
On a scrutiny of the accounts, the following matters are revealed:
- On 1st December 2017, a major repair was made in respect of the plant incurring 30,000 which was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on Reducing Balance Method.
- The closing stock for the year 2016-17 was overvalued by 12,000.
- To cover management cost, an annual charge of 24,000 should be made for the purpose of goodwill valuation.
On 1st April, 2016, a machine having a book value of 10,000 was sold for 11,000 but the proceeds were wrongly credited to Profit and Loss Account. No effect has been given to rectify the same. Depreciation is charged on machine @ 10% p.a. on reducing balance method.
The solution of Question 20 Chapter 3 of +2-A:
| Particulars / Year Ended |
2015-16 | 2016-17 |
2017-18 |
2018-19 |
| Profit/(Loss) | 1,01,000 | 1,24,000 | 1,00,000 | 1,40,000 |
| Add: Capitalization of Repairs | 30,000 | |||
| Less: Correct Depreciation | – 1,000 | – 2,900 | ||
| Add: Wrong Depreciation | 900 | 810 | ||
| Less: Overvaluation of Closing Stock | – 12,000 | |||
| Add: Overvaluation of Opening Stock | 12,000 | |||
| Less: Management Cost | – 24,000 | – 24,000 | – 24,000 | – 24,000 |
| Less: Sale of Assets wrongly credited | – 10,000 | |||
| Adjusted Profits/(Loss) | 77,000 | 78,000 | 1,17,900 | 1,13,910 |
| Year |
Adjusted Profit A |
Weight |
Product (E = C * D) |
| 2015 – 16 | 77,000 | 1 | 77,000 |
| 2016 – 17 | 78,000 | 2 | 1,56,000 |
| 2017 – 18 | 1,17,900 | 3 | 3,53,700 |
| 2018 – 19 | 1,13,910 | 4 | 4,55,640 |
| Total | 10 | 10,42,340 | |
|
Weighted Average Profit |
= | Total Product of Profit for past given years |
| Number of years |
| = | 10,42,340 | |
| 10 | ||
| = | 1,04,234 |
Number of years’ purchase = 3
| Goodwill | = | Weighted Average Profit X Number of years of purchase |
| Goodwill | = | 1,04,234 X 3 |
| Goodwill | = | 3,12,702 |
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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