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3.8 Double Entry Book Keeping—CBSE XII

2. CALCULATION OF WEIGHTED PROFIT
Year Ended Profit (`) Weights Weighted Profit (`)
31st March, 2014 1,05,000 1 1,05,000
31st March, 2015 80,000 2 1,60,000
31st March, 2016 1,15,000 3 3,45,000
31st March, 2017 1,35,000 4 5,40,000
31st March, 2018 1,90,000 5 9,50,000
15 21,00,000
Total of Weighted Profit ` 21,00,000
`
Weighted Average Profit = Total of Weights = 15 = 1,40,000
Number of Years’ Purchase = 3
∴ Value of Goodwill = Weighted Average Profit × Number of Years’ Purchase
= ` 1,40,000 × 3 = ` 4,20,000.
Illustration 11.
The average profit earned by a firm is ` 80,000 which includes undervaluation of stock of
` 8,000 on an average basis. The capital invested in the business is ` 8,00,000 and the normal
rate of return is 8%. Calculate goodwill of the firm on the basis of 7 times the super profit.
(Delhi 2015 C)
Solution: Average Profit = ` 80,000
Undervaluation of Stock = ` 8,000
Adjusted Average Profit = ` 80,000 + ` 8,000 (Note) = ` 88,000
Normal Rate of Return
Normal Profit = Capital Employed (Investment) ×
= ` 8,00,000 × = ` 64,000 100
Super Profit = Adjusted Average Profit – Normal Profit
= ` 88,000 – ` 64,000 = ` 24,000
Goodwill = Super Profit × 7
= ` 24,000 × 7 = ` 1,68,000.
Note: Undervaluation of stock reduces the net profit. Hence, it is added to determine adjusted profit.
Unsolved Questions

1. X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z for 1/5th share. For this
purpose, the Goodwill of the firm is to be valued on the basis of three years’ purchase of last five years’
average profits.
The profits were:
Year 2013–14 2014–15 2015–16 2016–17 2017–18
Profits (`) 50,000 60,000 40,000 65,000 80,000
The profit of 2016–17 was calculated after charging ` 5,000 for loss of goods by fire. Calculate the Goodwill
of the firm. [Ans.: Value of Goodwill = ` 1,80,000.]
2. Calculate the value of Goodwill as on 1st April, 2018 on the basis of three years’ purchase of the average
profits of the last five years. The profits and losses for the years were: 2013–14—(Loss) ` 80,000 (including
Profit on sale of furniture during the year ` 4,000), 2014–15—` 1,84,000, 2015–16—` 1,00,000 (profit on
sale of machinery during the year ` 10,000); 2016–17—` 1,50,000; 2017–18—` 1,80,000 (including loss on
sale of computer ` 10,000). [Ans.: Goodwill = ` 3,18,000; Average Profit = ` 1,06,000.]