Page 38 - ISCDEBK-12

Goodwill: Concept and Mode of Valuation 2.3

Solved Questions

Illustration 1.
X and Y are partners sharing profits in the ratio of 3 : 2. They agree to admit Z into
partnership for 1/5th share. Goodwill of the firm for this purpose is to be valued at three
years’ purchase of the weighted average profit of the past 4 years.
1. The appropriate weights to be used and profits are:

Year Weight Profit (`)
2014–15 1 15,30,000
2015–16 2 20,30,000
2016–17 3 25,30,000
2017–18 4 30,30,000
2. In 2015–16, 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% on Diminishing Balance
Method.
3. Interest on non-trade investments is ` 10,000 in each year.
4. Closing Inventories were undervalued by ` 10,000 in 2015–16, by ` 9,100 in 2016–17,
by ` 8,290 in 2017–18.
5. On 1st October, 2016, a major repair was carried out on plant incurring ` 80,000 which
amount was charged to revenue. The said sum is agreed to be capitalised for computation
of goodwill subject to depreciation @ 10% p.a. on Diminishing Balance Method.
6. It is also agreed that ` 20,000 be charged on annual basis as management expenses
which have not been charged earlier.
Calculate the value of goodwill.

Solution: CALCULATION OF ADJUSTED PROFITS

Particulars 2014–15 2015–16 2016–17 2017–18
Given Profit 15,30,000 20,30,000 25,30,000 30,30,000
Less: Interest on Non-Trade Investments 10,000 10,000 10,000 10,000
15,20,000 20,20,000 25,20,000 30,20,000
Less: Sale proceeds of machinery wrongly credited ... 11,000 ... ...
15,20,000 20,09,000 25,20,000 30,20,000
Add: Depreciation on above machinery (Note 1) ... 1,000 900 810
15,20,000 20,10,000 25,20,900 30,20,810
Add: Under valuation of closing inventories (Note 3) ... 10,000 9,100 8,290
15,20,000 20,20,000 25,30,000 30,29,100
Less: Under valuation of Opening Inventories (Note 3) ... ... 10,000 9,100
15,20,000 20,20,000 25,20,000 30,20,000
Add: Repair Expenses debited to Profit and Loss A/c ... ... 80,000 ...
15,20,000 20,20,000 26,00,000 30,20,000
Less: Depreciation (Note 2) ... ... 4,000 7,600
15,20,000 20,20,000 25,96,000 30,12,400
Less: Management Expenses 20,000 20,000 20,000 20,000
Adjusted Profit 15,00,000 20,00,000 25,76,000 29,92,400