Page 247 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes
2
Y’s share is goodwill = 4,26,000 ×
5
Illustration 3 (Weighted Average Profit Method)
P Ltd. proposed to purchase the business carried on by Mr. C. Goodwill for this purpose is agreed
to be valued at three years’ purchase of the weighted average profits of the past four years.
Weights and profits are as below:
Years Weights Profits (`)
2007 1 1,01,000
2008 2 1,24,000

2009 3 1,00,000
2010 4 1,50,000
On a scrutiny of the accounts, the following matters were revealed:
(i) On 1 September, 2009 a major repair was made in respect of the plant incurring ` 30,000
st
which amount was charged to revenue. The said 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 2008 was overvalued by ` 12,000.
(iii) To cover management cost an annual charge of ` 24,000 should be made for the purpose of
goodwill valuation. C prepares his accounts on 31 December each year.
st
Compute the value of goodwill of the firm.
Solution
Computation of Adjusted Profits
` `
Profits - 2007 1,01,000
Less: Annual charge for management cost 24,000

Adjusted Profit for the year 2007 77,000
Profits - 2008 1,24,000
Less: Over valuation of closing stock 12,000
Annual charge for management cost 24,000 36,000

Adjusted Profits for the year 2008 88,000
Profits - 2009 1,00,000
Add: Overvaluation of opening stock (as closing
stock of previous year becomes opening stock of current year) 12,000

Major repair of plant (nature of capital expenditure) 30,000 42,000
Less: Depreciation Capital expenditure (major repair
@ 10% for 4 months September to December) 1,000 1,42,000

Annual charge for management cost 24,000 25,000
Adjusted Profits for 2009. 1,17,000

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