Model: Good will—Comprehensive On 31 March 2010, X Ltd. proposes to purchase the business carried on by Y Ltd. Goodwill for this purpose is agreed to be valued as 3 years’ purchase of the weighted average profits for the last 4 years. The appropriate weights to be used were decided as follows:
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The profits for these years are 2006-07: Rs.6,20,000; 2008–09: Rs.7,40,000; 2007–08: 5,80,000; 2009–10: Rs.8,60,000.On scrutinizing the accounts, the following facts are revealed: On 1 October 2008, major repairs were carried out in respect of the plant spending 2,00,000; the amount was charged to revenue. The said sum is agreed to be capitalized for the purpose of calculation of goodwill subject to the adjustment for depreciation @ 10% p.a. on reducing balance method. The closing stock for the year 2007–08 was overvalued by Rs.90,000. To cover management cost, an annual charge of Rs.2,00,000 is to be made while calculating goodwill. Compute the value of goodwill of the transfer or company.