Calculate the amount of adjusted profit for the year ended 31 March 2021 for the purpose of valuation of Goodwill from the following information:
Profit for the year ended 31 March 2021: ₹80,000
On 1 July, 2020, a major plant repair was undertaken for ₹10,000 which was charged to Revenue. The said sum is to be capitalized for Goodwill valuation subject to adjustment of depreciation @ 10% p.a. on reducing balance method.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → ₹89,250
The plant repair is capital expenditure wrongly charged to revenue. For valuing goodwill it is added back to the profit, and depreciation on it for the part of the year it was in use is deducted.
Profit as given = ₹80,000
Add: Plant repair capitalised = ₹10,000
Less: Depreciation for 9 months (1 July 2020 to 31 March 2021) = ₹10,000 × 10% × 9/12 = ₹750
Adjusted profit = ₹80,000 + ₹10,000 − ₹750 = ₹89,250
Charging depreciation for a full year (₹1,000) gives ₹89,000, and ignoring depreciation gives ₹90,000.
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