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Question
From the following information, calculate the value of goodwill on the basis of 3 years purchase of average profits of last four years.
| Year | Result | Amount (₹) |
| 2015 | Profit | 5,000 |
| 2016 | Profit | 8,000 |
| 2017 | Loss | 3,000 |
| 2018 | Profit | 6,000 |
Solution
Calculation of goodwill:
| Year | Profit |
| 2015 | 5,000 |
| 2016 | 8,000 |
| 2018 | 6,000 |
| 19,000 | |
| (−) 2017 loss | 3,000 |
| Total profit | 16,000 |
Average profit = `"Total profit"/"Number of years"`
= `(16,000)/4`
= ₹ 4,000
Valuation of goodwill = Average profit × No. of years purchase
= ₹ 4,000 × 3
= ₹ 12,000
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