This document provides the step-by-step work to calculate goodwill using the weighted average profit method based on information provided about a firm's profits over the last four years. The summary calculations are as follows: 1) The adjusted profits for each of the last four years are calculated by making adjustments for capital expenditures charged to revenue, depreciation, over/undervaluation of stocks, and management costs. 2) A weighted average profit of Rs. 40,000 is calculated based on the adjusted profits and assigned weights for each year. 3) Applying the weighted average profit of Rs. 40,000 to the given three years purchase calculation yields a calculated goodwill value of Rs. 1,20,

1. ACCOUNTANCY
CLASS-XII
SOLUTION WITH EXPLANATION
By Geeta Handa
BOOK : Double Entry Book Keeping T.S.GREWAL’S
Partnership-Goodwill : Nature and Valuation
Question No. 16
Geeta Handa

2. Geeta Handa
PGT Accountancy
• 20 years experience of teaching
accountancy.
• 14 years experience of checking
accountancy papers of CBSE
• Worked as examiner for conducting
practical exam of accountancy.
geet7handa@gmail.com Geeta Handa

3. Q16 Calculate goodwill of a firm on the basis of three years’ purchase of the
Weighted Average Profit of the last four years. The profits of the last four financial
years ended 31st March, were 2017--Rs.25,000 ; 2018 - Rs.27,000; 2019- Rs.46,900;
2020 – Rs.53,810.
The weights assigned to each year are : 2017-1; 2018 –2; 2019-3; 2020 – 4;
Geeta Handa

4. Q16 Calculate goodwill of a firm on the basis of three years’ purchase of the
Weighted Average Profit of the last four years. The profits of the last four financial
years ended 31st March, were 2017--Rs.25,000 ; 2018 - Rs.27,000; 2019- Rs.46,900;
2020 – Rs.53,810. The weights assigned to each year are : 2017-1; 2018 –2; 2019-3;
2020 – 4; You are supplied the following information :
(i). On 1st April, 2017 a major plant repair was undertaken for Rs.10,000 which was
charged to revenue. The said sum is to be capitalised for goodwill calculation
subject to adjustment of depreciation of 10% on Reducing Balance Method.
(ii) The Closing stock for the year ended 2018 and 2019 were overvalued by Rs.1,000
and Rs.2,000 respectively.
Geeta Handa

5. Q16 Calculate goodwill of a firm on the basis of three years’ purchase of the
Weighted Average Profit of the last four years. The profits of the last four financial
years ended 31st March, were 2017--Rs.25,000 ; 2018 - Rs.27,000; 2019- Rs.46,900;
2020 – Rs.53,810. The weights assigned to each year are : 2017-1; 2018 –2; 2019-3;
2020 – 4; You are supplied the following information :
(i). On 1st April, 2017 a major plant repair was undertaken for Rs.10,000 which was
charged to revenue. The said sum is to be capitalised for goodwill calculation
subject to adjustment of depreciation of 10% on Reducing Balance Method.
(ii) The Closing stock for the year ended 2018 and 2019 were overvalued by Rs.1,000
and Rs.2,000 respectively.
(iii) To cover management cost an annual charge of Rs.5,000 should be made for the
purpose of goodwill valuation.
Geeta Handa

6. Q16 Calculate goodwill of a firm on the basis of three years’ purchase of the
Weighted Average Profit of the last four years. The profits of the last four financial
years ended 31st March, were 2017--Rs.25,000 ; 2018 - Rs.27,000; 2019- Rs.46,900;
2020 – Rs.53,810. The weights assigned to each year are : 2017-1; 2018 –2; 2019-3;
2020 – 4; You are supplied the following information :
(i). On 1st April, 2017 a major plant repair was undertaken for Rs.10,000 which was
charged to revenue. The said sum is to be capitalised for goodwill calculation
subject to adjustment of depreciation of 10% on Reducing Balance Method.
(ii) The Closing stock for the year ended 2018 and 2019 were overvalued by Rs.1,000
and Rs.2,000 respectively.
(iii) To cover management cost an annual charge of Rs.5,000 should be made for the
purpose of goodwill valuation.
Geeta Handa

7. Geeta Handa
Formula for Calculation of Goodwill by Weighted Average Profit Method
• Goodwill
= Weighted Average Profit X No. of Years’ Purchased
• Weighted Average Profit =
Total of Weighted Profits
Total of Weights

8. Formula for Adjusted Profits
Adjusted Profits / Normal Business Profits = Profits of the Year
− Abnormal Gain(non operating )
+ Abnormal Loss
Geeta Handa

9. Formula for Adjusted Profits
Adjusted Profits = Profits of the Year
+ Capital Expenditure Charged as Revenue Expenditure
(Plant repairs charged to revenue is to be capitalized )
Geeta Handa

10. Formula for Adjusted Profits
Adjusted Profits = Profits of the Year
+ Capital Expenditure Charged as Revenue Expenditure
− Depreciation ( on plant repairs to be capitalized)
Geeta Handa

11. Formula for Adjusted Profits
Adjusted Profits = Profits of the Year
+ Capital Expenditure Charged as Revenue Expenditure
− Depreciation
─ Overvaluation of Closing Stock
Geeta Handa

12. Formula for Adjusted Profits
Adjusted Profits = Profits of the Year
+ Capital Expenditure Charged as Revenue Expenditure
− Depreciation
─ Overvaluation of Closing Stock
+ Overvaluation of Opening Stock
Geeta Handa

13. Formula for Adjusted Profits
Adjusted Profits = Profits of the Year
+ Capital Expenditure Charged as Revenue Expenditure
− Depreciation
─ Overvaluation of Closing Stock
+ Overvaluation of Opening Stock
─ Management Cost (to be cover as annual charge )
Geeta Handa

14. Calculation of Adjusted Profit / Normal Business Profit
Years
ended 31st
March
Profits
(Rs.)
(a)
2017 25,000
2018 27,000
2019 46,900
2020 53,810
Geeta Handa

15. Calculation of Adjusted Profit / Normal Business Profit
Years
ended 31st
March
Profits
(Rs.)
(a)
Add Plant
Capitalized
(b)
2017 25,000
2018 27,000 + 10,000
2019 46,900
2020 53,810
Geeta Handa

16. Geeta Handa
Working Note :
Depreciation on Plant’s repairs capitalized @10% on Reducing Balance Method
(Written Down Value Method)
• From 1st April 2017 to 31st March 2018 => 10,000 X
10
100
= Rs.1,000
( On Cost Rs.10,000)
• From 1st April 2018 to 31st March 2019 => 9,000 X
10
100
= Rs.900
( On Book Value = 10,000 ─ 1,000 = 9,000)
• From 1st April 2019 to 31st March 2020 => 8,100 X
10
100
= Rs.810
( On Book Value = 9,000 ─ 900 = 8,100 )

17. Calculation of Adjusted Profit / Normal Business Profit
Years
ended 31st
March
Profits
(Rs.)
(a)
Add Plant
Capitalized
(b)
Less
Depreciation
(c)
2017 25,000
2018 27,000 + 10,000 ─ 1,000
2019 46,900 ─ 900
2020 53,810 ─ 810
Geeta Handa

18. Calculation of Adjusted Profit / Normal Business Profit
Years
ended 31st
March
Profits
(Rs.)
(a)
Add Plant
Capitalized
(b)
Less
Depreciation
(c)
Less overvaluation
of Closing Stock
(d)
2017 25,000
2018 27,000 + 10,000 ─ 1,000 ─ 1,000
2019 46,900 ─ 900 ─ 2,000
2020 53,810 ─ 810
Geeta Handa

19. Calculation of Adjusted Profit / Normal Business Profit
Years
ended 31st
March
Profits
(Rs.)
(a)
Add Plant
Capitalized
(b)
Less
Depreciation
(c)
Less over
of Closing
Stock (d)
Add
overvaluation of
Opening Stock (e)
2017 25,000
2018 27,000 + 10,000 ─ 1,000 ─ 1,000
2019 46,900 ─ 900 ─ 2,000 + 1,000
2020 53,810 ─ 810 + 2,000
Geeta Handa

20. Calculation of Adjusted Profit / Normal Business Profit
Years
ended 31st
March
Profits
(Rs.)
(a)
Add Plant
Capitalized
(b)
Less
Depreciation
(c)
Less over
of Closing
Stock (d)
Add over
of Opening
Stock (e)
Less
Management
Cost (f)
2017 25,000 ─ 5,000
2018 27,000 + 10,000 ─ 1,000 ─ 1,000 ─ 5,000
2019 46,900 ─ 900 ─ 2,000 + 1,000 ─ 5,000
2020 53,810 ─ 810 + 2,000 ─ 5,000
Geeta Handa

21. Calculation of Adjusted Profit / Normal Business Profit
Years
ended 31st
March
Profits
(Rs.)
(a)
Add Plant
Capitalized
(b)
Less
Depreciation
(c)
Less over
of Closing
Stock (d)
Add over
of Opening
Stock (e)
Less Manag
ment Cost
(f)
Adjusted
Profit (Rs.)
(a+b-c-d+e-f)
2017 25,000 ─ 5,000 20,000
2018 27,000 + 10,000 ─ 1,000 ─ 1,000 ─ 5,000 30,000
2019 46,900 ─ 900 ─ 2,000 + 1,000 ─ 5,000 40,000
2020 53,810 ─ 810 + 2,000 ─ 5,000 50,000
Geeta Handa

22. Calculation of Adjusted Profit / Normal Business Profit
Years ended
31st March
Adjusted
Profit
(Rs.)
(a)
*
Weights
(b)
Weighted Profit
(Rs.)
(a X b )
2017 20,000 1 20,000 X 1 = 20,000
2018 30,000 2 30,000 X 2 = 60,000
2019 40,000 3 40,000 X 3 = 1,20,000
2020 50,000 4 50,000 X 4 = 2,00,000
Geeta Handa
Note * : weights are given in the question

23. Calculation of Adjusted Profit / Normal Business Profit
Years ended 31st
March
Adjusted
Profit (Rs.)
(a)
Weights
(b)
Weighted Profit
(Rs.)
(a X b )
2017 20,000 + 1 + 20,000
2018 30,000 + 2 + 60,000
2019 40,000 + 3 + 1,20,000
2020 50,000 + 4 + 2,00,000
Total of Weights = 10 Total of Weighted Profits = 4,00,000
Geeta Handa

24. Geeta Handa
Calculation of Weighted Average Profit Method
Weighted Average Profit =
Total of Weighted Profits
Total of Weights
=
4,00,000
10
= Rs.40,000

25. Geeta Handa
Calculation of Goodwill by Weighted Average Profit Method
Goodwill
= Weighted Average Profit X No. of Years’ Purchased
= 40,000 X 3 = Rs.1,20,000
Answer : Goodwill = Rs. 1,20,000

26. Hit the Like Button
Subscribe
Mail Your Doubts or Suggestions
at
geet7handa@gmail.com
Geeta Handa