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,
 
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= 2706006= Rs 45100

goodwill at 2 year's purchase= 45100×2= Rs 90,200

Regards!!

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