(Weighted Average Profit Method when Past Adjustments are Made.)
Sahil and Anupam are partners sharing profits in the ration of 3 : 2 They admit Amit into partnership. It was agreed to value goodwill at three years' purchase on the basis of Weighted Average Profit of the past five years. Weights being assigned to each year were:
31st March, 2015 - 1, 31st March, 2016 -2, 31st March, 2017 - 3, 31st March, 2018 - 4 and 31st March, 2019 - 5.
The profits for these five years were:
`{:("Year Ended",,"Profits (Rs.)"),("31st March, 2015",,"1,80,000,"),("31st March, 2016",,"1,60,000,"),("31st March, 2017",,"2,50,000,"),("31st March, 2018",,"3,00,000",),("31st March, 2019",,"3,50,000".):}`
Secutiny of books of account revealed that:
1. An abnormal gain of Rs. 20,000 was earned in the year ended 31st March, 2016.
2. An abnormal loss of Rs. 10,000 was incurred in the year ended 31st March, 2017.
3. Expense of Rs. 50,000 incurred to overhaul a machinery Account. Depreciation is charged on Machinery @ `20%` on Written Down Value Method.
4. Closing Stock as on 31st March, 2018 was undervalued by Rs. 20,000.
Calculate value of goodwill.

Options

A. 777000
B. 857000
C. 864000
D. 858000

Answer

D

Explanation

Weighted Average Profit`=("Total Normal Profit")/("Number of Years")=("Rs. 42,90,000")/(15)=` Rs. 2,86,000.
` " Value of Goodwill" = "Weighted Average Profit" xx "No. of Years' Purchase " `
` " " ="Rs. 2,86,000 " xx 3 = "Rs. 8,58,000".`
*Calculation of Adjustment to profit for the year ended 31st March, 2018:
`{:("1.Capital espenditure (Overhaul of Machinery) Wrongly debited",Rs.),(" to profit and Loss Account to be added to profit for the year", "50,000"),("2.Closing stock being undervalued reduced the profit by the much amount.", ),(" Hence,to be added to profit for the year",ul("20,000")),(,"70,000"),("3.Less: Depreciation @ "20%" on Rs. 50,000, being depreciation on Rs. 50,000",ul("10,000")),(,ulul("60,000")):}`
** Calculation of Adjustment to Profit for the year ended 31st March, 2019:
`{:("1. Depreciation on Machinery@ " 20%" of Rs. 40,000 (Rs. 50,000 - Rs. 10,000,", "Rs."),(" depreciation for the year ended 31st March, 2018). Profit will be reduced by Rs. 8,000.","(8,000)"),(2. "Closing Stock as at 31st March, 2018 was undervalued by Rs. 20,000.Closing stock",),(" of previous years becomes Opening Stock of next year. It means Opening Stock",),(" was carried to next year RS. 20,000 less. Thus, profit for the year ended 31st March, 2019",),(" is higher by Rs. 20,000. Hence, will be reduced by Rs. 20,000.",ul("(20,000)")),(,ulul("(28,000)")):}`