It was agreed to calculate the value of goodwill of a firm at three year's purchase of the weighted average profits of the past four years. The appropriate weights to be used to each year ended on 31st March are : 2012 - 1, 2013 - 2, 2014 - 3, 2015 - 4.
The profits for these years ended on 31st March are : 2012 Rs. 20,200, 2013 - Rs. 24,800, 2014 Rs. 20,000, and 2015 Rs. 30,000.
On a scrutiny of the accounts the following matters are revealed :-
(i) On 1st December, 2013 a major repair was made in respect of the plant incurring Rs. 6,000 which amount was charged to revenue. The paid sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.
(ii) The closing stock for the year ending on 31st March 2013 was over-valued by Rs. 2,400.
(iii) To cover management cost an annual charge of Rs. 4,800 should be made for the purpose of goodwill valuation.
Compute the value of goodwill.

Explanation

Calculation of Weighted Average Profits
`{:("Year","Profits","Weight","Products"),(,"(Rs.)",,),(2012,"15,400"," 1","15,400"),(2013,"17,600"," 2","35,200"),(2014,"23,400"," 3","70,200"),(2015,"24,620"," 4","98,480"),(,,bar ul(" 10"),bar ul("2,19,280")""):}`
Weighted Average Profits = `(2,19,280)/(10)` = 21,928
Goodwill at 3 year's purchase = Rs. 21,928 `xx` 3 = Rs. 65,784
Working Notes :
(1) Depreciation for the year ending 31st March, 2014 = 10% of Rs. 6,000 for 4 months
`= 6,000 xx (10)/(100) xx (4)/(12) =` Rs. 200.
(2) Depreciation for the year ending 31st March, 2015 = 10% of Rs. 5,800 (i.e., 6,000 - 200)
= Rs. 5,800 `xx (10)/(100) =` Rs. 580.
(3) Closing Stock of 2013 automatically becomes the OPening Stock of 2014.