Q.A firm's reported profits for three years were: 2021 – ₹90,000 (includes an abnormal gain of ₹6,000 on the sale of a fixed asset); 2022 – ₹1,02,000 (no adjustment needed); 2023 – ₹1,14,000 (includes an abnormal loss of ₹6,000 due to a strike). Weights of 1, 2, and 3 are to be assigned to 2021, 2022, and 2023 respectively. Calculate the goodwill at 2 years' purchase of the weighted average profit, after making the necessary adjustments.

Each year's profit must first be corrected for its abnormal item — the gain on sale of the asset removed, and the strike loss added back — and only then should the weights be applied, since weighting an unadjusted profit would carry the distortion straight into the goodwill figure.

Step 1 — Adjust each year's profit for its abnormal item:

Step 2 — Apply the given weights:

Cross-check: the sum of the adjusted profits (84,000 + 1,02,000 + 1,20,000 = 3,06,000) divided by 3 gives the simple average of 1,02,000; since profits are rising, the weighted average of 1,08,00 …

Students sometimes apply the weights to the original (unadjusted) profits and only correct for the abnormal items afterwards, or forget to adjust before weighting altogether. Always adjust each year's profit for abnormal items F …