Nice Ltd. proposed to acquire the business of Kajal & Co. It was agreed to value goodwill at 3 years purchase of the weighted average profits of the past 4 years. Profits and weights are as under: Year Profit (₹) Wei

CS Executive · Company Accounts & Auditing Practices · PYQS · December 2015
Nice Ltd. proposed to acquire the business of Kajal & Co. It was agreed to value goodwill at 3 years purchase of the weighted average profits of the past 4 years. Profits and weights are as under: Year Profit (₹) Weight 2011-12 50,500 1 2012-13 62,000 2 2013-14 50,000 3 2014-15 80,000 4 Following further information is revealed: (i) In the year 2012-13, closing stock was overvalued by ₹6,000. (ii) On 1st December, 2013, a major part was added to the plant at the cost of ₹15,000 which was charged to revenue instead of capitalising the same. It was decided to charge depreciation at 10% per annum on reducing balance method. (iii) Annual charges of ₹12,000 should be made towards management charges. Calculate the value of goodwill.

Answer & Explanation:

(i) Calculation of Adjusted profits Particulars 2011-12 2012-13 2013-14 2014-15 Profits as given 50,500 62,000 50,000 80,000 Less: management expenses (12,000) (12,000) (12,000) (12,000) Less: overvaluation of closing stock (6,000) Add: overvaluation of opening stock 6,000 Add: major repairs to be capitalised 15,000 Less: Depreciation on capital expenditure for 4 months @ 10% (500) (1,450) Adjusted Profit 38,500 44,000 58,500 66,550 (ii) Calculation of Average profit Year Adjusted profit Weights Weighted profit 2011-12 38,500 1 38,500 2012-13 44,000 2 88,000 2013-14 58,500 3 1,75,500 2014-15 66,550 4 2,66,200 Total 10 5,68,200 Average profit = 5,68,200 / 10 = ₹56,820 Goodwill at 3 years purchase of average profit = ₹56,820 × 3 = ₹1,70,460

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