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Question
From the following information relating to a partnership firm, find out the value of its goodwill based on 3 years purchase of average profits of the last 4 years:
- Profits of the years 2015, 2016, 2017 and 2018 are ₹ 10,000, ₹ 12,500, ₹ 12,000 and ₹ 11,500 respectively.
- The business was looked after by a partner and his fair remuneration amounts to ₹ 1,500 per year. This amount was not considered in the calculation of the above profits.
Solution
Average profit = `"Total profit"/"Number of years"`
= `(10,000 + 12,500 + 12,000 + 11,500)/4`
= `(46,000)/4`
= ₹ 11,500
| Particulars | ₹ |
| Average profit before adjusting four remunerations to the partner | 11,500 |
| Less: Remuneration to the partner | 1,500 |
| Average Profit | 10,000 |
Valuation of goodwill = Average profit × No. of years purchase
= ₹ 10,000 × 3
= ₹ 30,000
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