Problem 3: Goodwill calculation - Weighted Average Profits method] The trading profits of a company for...

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Problem 3: Goodwill calculation - Weighted Average Profits method] The trading profits of a company for the past 4 years were

business accounting

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Answer 1

Answer #1

All amounts are in terms of Dhs.

In the given question :-

There is no information about the capital employed in the business.

Hence, we assumed value of capital employed as 1000000 (assumption is for purely calculation purpose)

Standard rate of return is given as 8%.

Standard return = 1000000 x 8% = 80000

calculation of weighted average profits

year	Profits	weights	products
2015	120000	1	120000
2016	136000	1.5	204000
2017	164000	2	328000
2018	172000	2.5	430000
		7	1082000

average profits = 1082000/7

= 154571.4285

= 154571 (round off)

standard rate of return = 80000 (as calculated above)

super profit = average profits - standard rate of return

= 154571 - 80000

= 74741

super profit = 74741

Goodwill at purchase of 3 years is as follows :-

goodwill = super profit x number of years of purchase

= 74741 x 3

= 224223

the value of goodwill at 3 years purchase of average super profits for the four years = 224223

these are all the information required to solve the above given question.

I hope, all the above mentioned calculations and information is useful and helpful to you. if there is any requirement explanation regarding above provided answer please mention them in comment box.

Thank you.

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Answer 2

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