The adjustment required for overvaluation of closing stock, while calculating
adjusted profit for calculating goodwill is:

(A) reduction from concerned year’s profit.
(B) reduction from next year’s profit.
(C) addition to next year’s profit.
(D) addition to previous year’s profit.

Choose the correct answer from the options given below:

The correct answer is (A) and (C) only.

Let us understand the step-by-step logical reasoning behind this adjustment when calculating the adjusted profit for goodwill valuation:

1. Effect on the Concerned Year's Profit (Statement A):
Closing stock is credited to the Trading Account. Therefore, a higher valuation of closing stock (overvaluation) artificially inflates the gross profit and, consequently, the net profit of that concerned year.
To find the true, normal profit for calculating goodwill, we must reverse this artificial increase. Thus, the amount of overvaluation of closing stock must be deducted (reduced) from the concerned year’s profit.
This confirms that statement (A) reduction from concerned year’s profit is correct.

2. Effect on the Next Year's Profit (Statement C):
The closing stock of the concerned year becomes the opening stock of the next financial year.
Opening stock is debited to the Trading Account as an expense. An overvalued opening stock artificially inflates the expenses of the next year, which in turn reduces (understates) the profit of that next year.
To rectify this and arrive at the adjusted profit for the next year, we must add back the overvalued amount to that year's profit.
This confirms that statement (C) addition to next year’s profit is correct.

Therefore, both adjustments (A) and (C) are required to rectify the overvaluation of closing stock.