Page 41 - MA-12

Goodwill: Concept and Mode of Valuation 2.7

CALCULATION OF WEIGHTED AVERAGE PROFIT
Year Ended Profits (`) Weights Product (`)
31st March, 2016 1,54,000 1 1,54,000
31st March, 2017 1,55,000 2 3,10,000
31st March, 2018 2,35,900 3 7,07,700
31st March, 2019 2,27,910 4 9,11,640
Total 7,72,810 10 20,83,340

` 20 83 340, ,
Weighted Average profit = = ` 2,08,334.
10
(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. ` 2,000
added back on account of depreciation in the year 2015–16, ` 1,800 is added back in the year 2016–17
and ` 1,620 is added back in the year 2017–18.
3. Closing stock is overvalued by ` 24,000 in Financial year 2015–16 which is deducted and added in
financial year 2016–17 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 reducing balance method.
` 772 810, ,
(b) Average Profit = = ` 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
10 ˆ
Ê
= ` 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.
SuperProfit
(d) Goodwill = ¥100
Normal Rate of Return
= ` 163 203 ¥ 100 = ` 16,32,030.
,
,
10
Average Profit
(e) Capitlised Value of the Firm = ¥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.