Z Ltd. proposed to purchase the business carried on by M/s Ajay & Co. Goodwill for this purpose is agreed to be valued at three year's purchase of the weighted average profits of the past four years. The appropriate
CS Executive · Company Accounts & Auditing Practices · PYQS · June 2017
Z Ltd. proposed to purchase the business carried on by M/s Ajay & Co. Goodwill for this purpose is agreed to be valued at three year's purchase of the weighted average profits of the past four years. The appropriate weights to be used are: Year Weight 2012-13 1 2013-14 2 2014-15 3 2015-16 4 The profits for these years are: 2012-13 - ₹60,600; 2013-14 - ₹74,400; 2014-15 - ₹60,000 and 2015-16 - ₹84,000. On a scrutiny of the accounts the following matters are revealed : On 1st December, 2014 a major repair was carried out in respect of the plant incurring ₹20,000 which was charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to the adjustment of depreciation of 10% p.a. on reducing balance method. The closing stock for the year 2013-14 was overvalued by ₹14,000. To cover management cost an annual charge of ₹25,000 should be made for the purpose of goodwill valuation. Compute the value of goodwill of the firm.
Answer & Explanation:
Calculation of Adjusted Profits 2012-13 2013-14 2014-15 2015-16 Profit 60,600 74,400 60,000 84,000 Less: Over Valuation of Closing Stock --- 14,000 --- --- Add: Over Valuation of Opening stock --- --- 14,000 --- Add: Capital Exp. Treated As Revenue Exp. --- --- 20,000 --- Less: Depreciation --- --- 667 1,933 Less: Management Expenses 25,000 25,000 25,000 25,000 Adjusted profit 35,600 35,400 68,333 57,067 Calculation of Average Profits Year Ended 31st March Profits Weight Product 2012-13 35,600 1 35,600 2013-14 35,400 2 70,800 2014-15 68,333 3 2,04,999 2015-16 57,067 4 2,28,268 10 5,39,667 Average Profits = 5,39,667 / 10 = ₹53,967 Goodwill @ 3 years Purchase = 53,967 × 3 = ₹1,61,901
Topics: Goodwill Valuation
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