What is the correct sequence of calculating the value of goodwill through the weighted average profit method?
a) Divide the total of the product by the total number of weights.
b) Adjust each year's profits if there are any abnormal profits or losses
c) Multiply the weighted average profit with the Number of years purchase
d) Multiply the weights with the adjusted profits to find out the product.
e) Assign the weights to years. Give high weight to the profit of the recent year.
Choose the correct answer from the options given below.
Answer & explanation
Correct answer: option 4
The correct answer is option 4- bedac.
The correct sequence of calculating the value of goodwill through the weighted average profit method is as follows-
b) Adjust each year's profits if there are any abnormal profits or losses - Firstly if there is any abnormal gain or loss then it is deducted or added respectively from the particular year's profit.
e) Assign the weights to years. Give high weight to the profit of the recent year- Weights are assign to all years in the numbering from 1,2,3 and so on. Higher weight is provided to the latest year's profit.
d) Multiply the weights with the adjusted profits to find out the product- Now the weights assigned to year's profit and adjusted profit is multiplied to find out the product.
a) Divide the total of the product by the total number of weights- After that total of the product and weights is done and then the total of product is divided by the total no of weights to find out the weighted average profit.
c) Multiply the weighted average profit with the Number of years purchase - At last multiply the weighted average profit with no of years purchase to get value of goodwill.