Page 39 - ISCDEBK-12

2.4 Double Entry Book Keeping (Section A)—ISC XII

CALCULATION OF WEIGHTED AVERAGE PROFIT

Year Profits (`) Weights Product (`)
2014–15 15,00,000 1 15,00,000
2015–16 20,00,000 2 40,00,000
2016–17 25,76,000 3 77,28,000
2017–18 29,92,400 4 1,19,69,600
Total 10 2,51,97,600

` 2,51,97,60
Weighted Average Profit = = ` 25,19,760
10
Goodwill = Weighted Average Profit × No. of Years’ Purchase
= ` 25,19,760 × 3 = ` 75,59,280.
Notes:
1. Due to wrong entry passed initially, the Machinery Account was overvalued by ` 10,000. Depreciation
for the said amount of ` 10,000 was wrongly charged during the period 2015–2018, which is now
added back to Profit and Loss Account.
2. Depreciation for 2016–17 = ` 80,000 × 10/100 × 6/12 = ` 4,000
Depreciation for 2017–18 = (` 80,000 – ` 4,000) × 10/100 = ` 7,600.
Illustration 2.
From the following information, calculate the value of goodwill of M/s. Puneet and Gaurav:
(i) At three years’ purchase of Average Profit.
(ii) At three years’ purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average Profit.
Information:
(a) Average capital employed in the business—` 25,00,000.
(b) Trading profits:
Year Profit/Loss `
2016–17 Profit 7,50,000.
2017–18 Loss 6,25,000.
2018–19 Profit 21,25,000.
(c) Rate of interest expected from capital having regard to the risk involved—15%.
(d) Remuneration to each partner for his service (to be charged against profit)—` 12,500
per month.
(e) Assets (excluding goodwill)—` 30,00,000; Liabilities—` 2,50,000.
Solution:
(i) Goodwill at 3 years’ Purchase of Average Profit:
` 7,50,000 - ` 6,25,000 + ` 21,25,000
Average Profit = 3 = ` 7,50,000
Average Profit for Goodwill = ` 7,50,000 – Remuneration of Partners
= ` 7,50,000 – (` 12,500 × 2 × 12)
= ` 7,50,000 – ` 3,00,000 = ` 4,50,000
Goodwill = Average Profit × No. of Years’ Purchase
= ` 4,50,000 × 3 = ` 13,50,000.