Question
Explain the weighted average method for the valuation of goodwill.
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Answer
In the weighted average profit method is there is continuous increase in the profit, then we should give more weightage to the profit of recent years and give comparatively less weightage to the profits of previous years.
Goodwill $=$ Weighted average profit $\times$ No. of years of purchase
- Generally, weightage of different year's profit are numbered as $1,2,3…$
- After finding out the product of weightage with profit, average is workout which is known as weighted average profit.
- If specific instruction is given or profit of the business have continuous increasing or decreasing trend then one must find out goodwill by weighted average profit.
Goodwill $=$ Weighted average profit $\times$ No. of years of purchase
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The abridged profit and loss statement ending on $31-3-2020$ and $31-3-2021$ of KCG Company Ltd. are given as follows.
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→Prepare comparative statement of profit and loss.
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| Particulars | Note No. |
Amount (₹) | Percentage to sales | |||
| $31-3-2016$ $(₹)$ |
$31-3-2017$ $(₹)$ |
$31-3-2016$ $(\%)$ |
$31-3-2017$ $(\%)$ |
|||
| $(I)$ | Sales revenue | $25,00,000$ | $30,00,000$ | $100$ | $100$ | |
| $(II)$ | Expenses : | |||||
| $(i)$ Cost of goods consumed | $?$ | $?$ | $75$ | $78$ | ||
| $(ii)$ Financial expenses | $?$ | $?$ | $9.6$ | $8$ | ||
| $(iii)$ Depreciation | $?$ | $?$ | $3$ | $4$ | ||
| Total expenses | $21,90,000$ | $27,00,000$ | $87.6$ | $90$ | ||
| $(III)$ | Profit before tax | $3,10,000$ | $3,00,000$ | $12.4$ | $10$ | |
| $(IV)$ | Less : Income tax $30\%$ | $?$ | $90,000$ | $3.72$ | $3$ | |
| $(V)$ | Profit after tax | $?$ | $2,10,000$ | $8.68$ | $7$ | |
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