Weighted Average Profit Method is the method of computing goodwill, where value of Goodwill is equal to the (Weighted Average Profit X Number of year’s purchase). Weighted Average Profit are calculated as under : –
- Assign given weights to the profits of the respective years. Generally, higher weights are given to recent year profits.
- Multiply profits of respective year with the weights;
- Add all the Products so obtained
- Divide the sum of Products by number of years to get the Weighted Average Profit
Goodwill = Weighted Average Profit X Number of year’s purchase
Weighted Average Profit Method – Question 1 : –
The profits of a firm for the year ended 31st March for 2018 were as under :
What would be the value of goodwill on the basis of 1 years purchase of the weighted average profit of 2018 ?
Explanation : –
Weighted Average profit = 50000/1
= 50,000
Goodwill = Weighted Average Profit X Number of year’s purchase
= 50,000 X 1
= Rs. 50,000
Weighted Average Profit Method – Question 2 : –
The profits of a firm for the year ended 31st March for the last 2 years were as under : –
What would be the value of goodwill on the basis of 3 years purchase of the weighted average profits of the last two years, assuming weight of 1 and 2 are assigned to 2013 and 2014 respectively ?
Explanation : –
Weighted Average profit = 40800/3
= 13,600
Goodwill = Weighted Average Profit X Number of year’s purchase
= 13,600 X 3
= Rs. 40,800
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