Question

Goodwill is to be valued on the basis of 2 years purchases of last 5 years average profit. The profits and losses of last five years were as follows :

Year	1	2	3	4	5
Amount (₹)	30,000 (Profit)	40,000 (Profit)	70,000 (Profit)	30,000 (Loss)	50,000 (Profit)

Find out value of Goodwill.

Answer 1

Average profit = `("Total profit of given no. of years")/("No. of years given")`

`= (30,000 + 40,000 + 70,000  –  30,000 + 50,000)/5`

`= (1,60,000)/5`

= ₹ 32,000

Goodwill = Average profit × No. of years of purchase

= 32,000 × 2 = ₹ 64,000