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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.

CALCULATION OF ADJUSTED PROFIT |

Particulars | 2013Rs | 2014Rs | 2015Rs |

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 | PROFITRs | WEIGHT | PRODUCT |

2013 | 39600 | 1 | 39600 |

2014 | 42600 | 2 | 85200 |

2015 | 48600 | 3 | 145800 |

6 | 270600 |

**weighted average profit=**$\frac{270600}{6}=Rs45100$

**goodwill at 2 year's purchase= $45100\times 2=Rs90,200$**

Regards!!

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