In case of Admission:
Given a balance sheet as at 31 Dec 2008. The new partner was admitted on 1 Jan 2009.
Goodwill was agreed at 2 years purchase and was to be valued in accorfance to the weighted average gross profit method for the previous four years starting from this year.
Year 2005 - 6,000,000 Weight - 1
Year 2006 - 3,600,000 Weight - 3
Year 2007 - 8,400,000 Weight - 2
Year 2008 - 12,000,000 Weight - 3
Year 2009 - 10,000,000 Weight - 2
Req- Ascertain the amount of goodwill.
Question: will the average product be taken from 2005 - 2008 (4 years) or 2007 - 2009 (4 years)...the b/sheet date is 2008, admission date is 2009.
To ascertain the amount of goodwill, we need to calculate the weighted average gross profit for the previous four years, starting from the year following the balance sheet date (2009 in this case).
Given the weights and gross profit values for the years 2005 to 2009, it seems that the company has historical data for those years. Now, to calculate the weighted average gross profit using the weighted average gross profit method, we need to multiply each year's gross profit by its corresponding weight, sum up the results, and then divide by the sum of the weights.
The weights for the years are as follows:
Year 2005 - Weight 1
Year 2006 - Weight 3
Year 2007 - Weight 2
Year 2008 - Weight 3
Year 2009 - Weight 2
Since the new partner was admitted on 1st January 2009, the four-year period for the calculation of the weighted average gross profit should start from the year 2006 to 2009, as the admission date on 1st January 2009 falls within that period.
Therefore, we will consider the gross profit values for the years 2006, 2007, 2008, and 2009 and their respective weights to calculate the weighted average gross profit.
Here are the values we will use:
Year 2006 - Gross Profit: 3,600,000, Weight: 3
Year 2007 - Gross Profit: 8,400,000, Weight: 2
Year 2008 - Gross Profit: 12,000,000, Weight: 3
Year 2009 - Gross Profit: 10,000,000, Weight: 2
To calculate the weighted average gross profit, we will multiply each year's gross profit by its corresponding weight and sum up the results:
(3,600,000 * 3) + (8,400,000 * 2) + (12,000,000 * 3) + (10,000,000 * 2) = Total sum of weighted gross profit
Next, we need to find the total sum of the weights:
3 + 2 + 3 + 2 = Total sum of weights
Finally, to find the weighted average gross profit, we divide the total sum of weighted gross profit by the total sum of weights:
Total sum of weighted gross profit / Total sum of weights
The resulting value will give us the weighted average gross profit, which will be used to calculate the amount of goodwill.