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Question
Calculate value of goodwill on the basis of three years' purchase of average profit of the preceding five years which were as follows:
| Year | 2018-19 | 2017-18 | 2016-17 | 2015-16 | 2014-15 |
| Profits (₹) | 8,00,000 | 15,00,000 | 18,00,000 | 4,00,000 (Loss) |
13,00,000 |
Solution
Goodwill = Average Profit x Number's of year's purchase
Average Profit = `"Total Profits for past given years"/"Number of Years"`
= `[8,00,000 + 15,00,000 + 18,00,000 - 4,00,000 + 13,00,000]/5`
= `[50,00,000]/5`
= Rs. 10,00,000
Number of years’ purchase = 3
∴ Goodwill = 10,00,000 x 3 = Rs. 30,00,000.
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