Question
Q. 2. (A) X Ltd. proposed to purchase the business carried on by Y Ltd. Goodwill for this purpose was agreed to be valued at
Q. 2. (A) X Ltd. proposed to purchase the business carried on by Y Ltd. Goodwill for this purpose was agreed to be valued at 3 years' purchase of the weighted average profits of the past four years. The appropriate weights to be used are: 2011-12: 1; 2012-13: 2; 2013-14: 3; 2014-15: 4. The profits for these years were: 2011-12: ,81,000; 2012-13: ,395,000; 2013-14: ,3,120,000 and 2014-15: ,3,150,000. On a scrutiny of the accounts, the following were revealed: (1) On Sept. 30, 2013, a major repair was made in respect of machinery incurring ,20,000, which amount was charged to revenue. The said sum is agreed to be capitalized for goodwill calculation subject to adjustment of depreciation of 10% per annum by the reducing balance method. (2) The closing inventory for the year 2012-13 was undervalued by ,35,000. (3) To cover management expenses, an annual charge of ,10,000 should be made for the purpose of goodwill valuation. Compute the value of goodwill of the firm. Accounts are closed on 31st March each year. [Ans. Goodwill ,3,52,620.]
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