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Question
Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years? The profits for the last five years were as follows:
| Rs. | |
| 2013 | 40,000 |
| 2014 | 50,000 |
| 2015 | 60,000 |
| 2016 | 50,000 |
| 2017 | 60,000 |
Solution
Average Profit = `"Sum of given year's Profit"/"Number of given years"`
|
Year |
Profit |
|
2013 |
40,000 |
|
2014 |
50,000 |
|
2015 |
60,000 |
|
2016 |
50,000 |
|
2017 |
60,000 |
|
Sum of 5 years profit |
2,60,000 |
Average Profit = = `[52,000]/5` = 52,000
Goodwill = Average Profit × Number of Year’s Purchases
= 52,000 × 4 = Rs 2,08,000
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