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Question
Goodwill is to be valued at three years' purchase of four years' average profit. Profits for last four years ending on 31st March of the firm were:
2016 − ₹ 12,000; 2017 − ₹ 18,000; 2018 − ₹ 16,000; 2019 − ₹ 14,000.
Calculate amount of Goodwill.
Solution
Goodwill = Average Profit x Number's of year's purchase
Average Profit = `"Total Profits for past given years"/"Number of Years"`
= `[12,000 + 18,000 + 16,000 + 14,000]/4`
= `[60,000]/4`
= Rs. 15,000
Number of years’ purchase = 3
∴ Goodwill = 15,000 x 3 = Rs. 45,000.
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