Ques. Following information is available about the business of a firm:
1. Profits: in 2013, Rs 40,000; in 2014, Rs 50,000; in 2015, Rs 60,000;
2. Non-recurring income of Rs 1,000 is included in the profits of 2014;
3. Profits of 2013 have been reduced by Rs 6,000 because goods were destroyed by fire;
4. Goods haven't been insured but it is thought to insure them in future. The insurance premium is estimated at Rs 400 per year;
5. Reasonable remuneration of the proprietor of business is Rs 6,000 per year, but is hasn't been taken into account for calculation of above mentioned profits;
6. Profits of 2015 include Rs 5,000 income on investment.
Goodwill is agreed to be valued at 2 year's purchase of weighted average profits of the past 3 years. The appropriate weights to be used are:
2013- 1
2014- 2
2015- 3
Calculate the value of goodwill.
Dear student,
weighted average profit=
goodwill at 2 year's purchase=
Regards!!
CALCULATION OF ADJUSTED PROFIT |
Particulars | 2013 Rs | 2014 Rs | 2015 Rs |
profits | 40000 | 50000 | 60000 |
less: non recurring income | (1000) | ||
add: loss by fire (abnormal loss) | 6000 | ||
less: Insurance expenses | (400) | (400) | (400) |
less: remuneration | (6000) | (6000) | (6000) |
less: income from investment | (5000) | ||
Adjusted profit | 39600 | 42600 | 48600 |
CALCULATION OF WEIGHTED AVERAGE PROFITS |
YEAR | PROFIT Rs | WEIGHT | PRODUCT |
2013 | 39600 | 1 | 39600 |
2014 | 42600 | 2 | 85200 |
2015 | 48600 | 3 | 145800 |
6 | 270600 |
weighted average profit=
goodwill at 2 year's purchase=
Regards!!