Question

The adjustment required for overvaluation of closing stock, while calculating adjusted profit for calculating goodwill is:
(A) reduction from concerned years profit.
(B) reduction from next years profit.
(C) addition to next years profit.
(D) addition to previous years profit.
Choose the correct answer from the options given below :

• A. (A), (B), and (D) only
• B. (A) and (D) only
• C. (A) and (C) only
• D. (B), (C), and (D) only

Answer 1

The Correct Option is C

In accounting, an overvaluation of closing stock inflates the reported profit for the current period. To accurately calculate goodwill, adjustments are necessary:

• Deduct from current year's profit: The closing stock of the current year is a component of profit calculation. Its overvaluation artificially increases profit, requiring a corresponding deduction for correction.
• Add to next year's profit: The overvalued closing stock becomes the opening stock of the subsequent year. This overstatement in the opening stock will lead to an understatement of the next year's profit. Therefore, an addition is required to rectify this.

Consequently, the correct adjustments are: (A) a deduction from the profit of the period in which the overvaluation occurred, and (C) an addition to the profit of the following period. Thus, the correct selection is: (A) and (C) only