24 Aug 2020 MBA – 3rd SEM – CV - 191202064

Ques 3: Calculate goodwill of a firm on the basis of three year’ purchase of the weighted average profits
of the last four years. The profit of the last four years were: 2012 Rs. 20,200; 2013 Rs. 24,800; 2014 Rs.
20,000 and 2015 Rs. 30,000. The weights assigned to each year are: 2012 – 1, 2013 – 2, 2014 – 3 and 2015
– 4. You are supplied the following information:

1. On September 1, 2014 a major plant repair was undertaken for Rs. 6,000, which was charged to revenue.
The said sum is to be capitalized for goodwill calculation subject to adjustment of depreciation of 10%
p.a. on reducing balance method.
2. The Closing Stock for the year 2013 was overvalued by Rs. 2,400.
3. To cover management cost an annual charge of Rs. 4,800 should be made for purpose of goodwill
valuation.

Solution:

10 4
Depreciation for 2014 = ₹ 6,000 x x = ₹ 200
100 12

Depreciation for 2015 = 10% of (₹ 6,000 - ₹ 200)

= 10% of ₹ 5,800
= ₹ 580
Closing stock of 2013 will become opening stock for 2014.

Calculation of adjusted 2012 2013 2014 2015

profit Rs. Rs. Rs. Rs.
Given profit 20,200 24,800 20,000 30,000
Less: Management cost (-) 4,800 (-) 4,800 (-) 4,800 (-) 4,800
15,400 20,000 15,200 25,200
Add: Capital expenditure - - (+) 6,000 -
charged to revenue
15,400 20,000 21,200 25,200
Less: Unprovided - - (-) 200 (-) 580
depreciation
15,400 20,000 21,000 24,620
Less: Over valuation of - (-) 2,400 - -
closing stock
15,400 17,600 21,000 24,620
Add: Over value of opening - - (+) 2,400
stock
Adjusted profit 15,400 17,600 23,400 24,620

Calculation of Weighted Average Profit:

Year Profit Weight Product

(Rs.)
2012 15,400 1 15,400
2013 17,600 2 35,200
2014 23,400 3 70,200
2015 24,620 4 98,480
Total 10 2,19,280

Page | 1
24 Aug 2020 MBA – 3rd SEM – CV - 191202064

Total of Product
Weighted Average Profit =
Total of Weight

₹ 2,19,280
=
10

= ₹ 21,928

Goodwill = ₹ 21,928 x 3

= ₹ 65,784

Page | 2