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Question
Profits of a firm for the year ended 31st March for the last five years were:
| Year Ended | 31st March, 2015 | 31st March, 2016 | 31st March, 2017 | 31st March, 2018 | 31st March, 2019 |
| Profits (₹) | 20,000 | 24,000 | 30,000 | 25,000 | 18,000 |
Calculate value of goodwill on the basis of three years' purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2015, 2016, 2017, 2018 and 2019.
Solution
|
Year |
Profit |
× |
Weight |
= |
Product |
|
2015 |
20,000 |
× |
1 |
= |
20,000 |
|
2016 |
24,000 |
× |
2 |
= |
48,000 |
|
2017 |
30,000 |
× |
3 |
= |
90,000 |
|
2018 |
25,000 |
× |
4 |
= |
1,00,000 |
|
2019 |
18,000 |
× |
5 |
= |
90,000 |
|
Total |
|
|
15 |
|
3,48,000 |
Weighted Average Profit = `"Total Product of Profit"/"Total of weight"`
= `[3,48,000]/15` = Rs. 23,200
Goodwill = Weighted Average Profit x Number of Year's Purchase
= 23,200 x 3 = Rs. 69,600.
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