Page 42 - ISCDEBK-12

Goodwill: Concept and Mode of Valuation 2.7

CALCULATION OF WEIGHTED AVERAGE PROFIT
Year Ended Profits (`) Weights Product (`)
31st March, 2017 1,54,000 1 1,54,000
31st March, 2018 1,55,000 2 3,10,000
31st March, 2019 2,35,900 3 7,07,700
31st March, 2020 2,27,910 4 9,11,640
Total 7,72,810 10 20,83,340

Weighted Average profit = ` 20 83 340, , = ` 2,08,334.
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(a) Goodwill = Weighted Average Profit × Number of Years’ Purchase
= ` 2,08,334 × 3 = ` 6,25,002.
Working Notes:
1. ` 48,000 deducted as annual charge to cover management cost Or we can deduct one year’s cost from
Average Profit.
2. ` 22,000 was wrongly credited to Profit and Loss Account on proceed from sale of machinery. ` 1,000
added back on account of depreciation in the year 2017–18, ` 1,900 is added back in the year 2018–19
and ` 1,710 is added back in the year 2019–20.
3. Closing stock is overvalued by ` 24,000 in Financial year 2017–18 which is deducted and added in
financial year 2018–19 because opening stock is overvalued because of which profit is reduced.
4. A major repair of plant costing ` 60,000 was wrongly charged to revenue. Depreciation is charged
@ 10% p.a. on written down value method.

(b) Average Profit = ` 772 810, , = ` 1,93,203.
4
Goodwill = Average Profit × Number of Years’ Purchase
= ` 1,93,203 × 3 = ` 5,79,609.
(c) Super Profit = Average Profit – Normal Profit
Ê
10 ˆ
= ` 1,93,203 – 300 000, , ¥ 100 ¯ ˜ = ` 1,63,203.
Á
Ë
Goodwill = Super Profit × Number of Years’ Purchase
= ` 1,63,203 × 3 = ` 4,89,609.
(d) Goodwill = SuperProfit ¥100
NormalRate of Return

= `163 203¥ 100 = ` 16,32,030.
,
,
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(e) Capitlised Value of the Firm = AverageProfit ¥100
Normal Rate of Return
`193 203 100, , ¥
= = ` 19,32,030
10
Net Assets = ` 3,00,000 (Assets – Liabilities)
Goodwill = Capitalised Value of Firm – Net Assets
= ` 19,32,030 – 3,00,000 = ` 16,32,030.