Accountancy 6 Marks Question

X and Y are partners in a firm. They admit Z into partnership for equal share. It was agreed that goodwill will be valued at three years' purchase of average profit of last five years. Profits for the last five years were:

Year Ended	31st March, 2014	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018
Profit (₹)	90,000 (Loss)	1,60,000	1,50,000	65,000	1,77,000

Books of Account of the firm revealed that:

1. The firm had gain (profit) of ₹ 50,000 from sale of machinery sold in the year ended 31st March, 2015. The gain (profit) was credited in Profit and Loss Account.
2. There was an abnormal loss of ₹ 20,000 incurred in the year ended 31st March, 2016 because of a machine becoming obsolete in accident.
3. Overhauling cost of second hand machinery purchased on 1st July, 2016 amounting to ₹ 1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.

Calculate the value of goodwill.

Calculate the goodwill of a firm on the basis of three years' purchase of the weighted average profit of the last four years. The appropriate weights to be used and profits are:

Year	2014-15	2015-16	2016-17	2017-18
Profit (₹)	1,01,000	1,24,000	1,00,000	1,40,000
Weight	1	2	3	4

On a scrutiny of the accounts, the following matters are revealed:

1. On 1st December, 2016, a major repair was made in respect of the plant incurring ₹ 30,000 which 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.
2. The closing stock for the year 2015-16 was overvalued by ₹ 12,000.
3. To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of goodwill valuation.
4. In 2015-16, a machine having a book value of ₹ 10,000 was sold for ₹ 11,000 but the proceeds were wrongly credited to Profit and Loss Account. No effect has been given to rectify the same. Depreciation is charged on machine @ 10% p.a. on reducing balance method.

From the following information, calculate value of goodwill of the firm:

1. At three years' purchase of Average Profit.
2. At three years' purchase of Super Profit.
3. On the basis of Capitalisation of Super Profit.
4. On the basis of Capitalisation of Average profit.

Information:

1. Average Capital Employed is ₹ 6,00,000.
2. Net Profit/(Loss) of the firm for the last three years ended are:
3. 31st March, 2108–₹ 2,00,000, 31st March, 2107–₹ 1,80,000, and 31st March, 2106–₹ 1,60,000.
4. Normal Rate of Return in similar business is 10%.
5. Remuneration of ₹ 1,00,000 to partners is to be taken as charge against profit.
6. Assets of the firm (excluding goodwill, fictitious assets and not-trade investments) is ₹ 7,00,000 whereas Partners' Capital is ₹ 6,00,000 and Outside Liabilities ₹ 1,00,000.

Sumit purchased Amit's business on 1st April, 2018. Goodwill was decided to be valued at two years' purchase of average normal profit of last four years. The profits for the past four years were:

Year Ended	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018
Profit (₹)	80,000	1,45,000	1,60,000	2,00,000

Books of Account revealed that:

1. Abnormal loss of ₹ 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2015.
2. A fixed asset was sold in the year ended 31st March, 2016 and gain (profit) of ₹ 25,000 was credited to Profit and Loss Account.
3. In the year ended 31st March, 2017 assets of the firm were not insured due to oversight. Insurance premium not paid was ₹ 15,000.

Calculate the value of goodwill.