(Weighted Average Profit Method when Past Adjustments are Made.)
Akhil and Nikhil are partners sharing profits equally. They admitted Dinesh into partnership. It was agreed to value goodwill at three years' purchase following Weighted Average Profit Method on the basis of past five years' profits. Weights assigned to each year would be - years ended 31st March, 2015 - 1, 2016 - 2, 2017 - 3, 2018 - 4 and 2019 - 5.

Scrutiny of books of account revealed the following:
1. There was an abnormal loss of Rs. 15,000 during the year ended 31st March, 2015.
2. There was an abnormal gain of Rs. 10,000 during the year ended 31st March, 2017.
3. Closing Stock as on 31st March, 2018 was overvalued by Rs. 15,000.
Calculate value of goodwill.

Explanation

* Closing Stock being overvalued on 31st March, 2018 means that profit for the year ended 31st March, 2018 is shown at higher amount. It has effect on the profit for the next year, i.e., Profit for the year ended 31st March, 2019 is shown at lower amount as Closing Stock of previous year is carried forward as Opening Stock of next year.

Weighted Average Profit`=("Total Normal Profit")/("Number of Years")=("Rs. 21,00,000")/(15)=` Rs. 1,40,000.
` :. " Value of Goodwill" = "Weighted Average Profit" xx "No. of Years' Purchase " `
` " " ="Rs. 1,40,000 " xx 3 = "Rs. 4,20,000".`