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Question
From the following information relating to Sridevi enterprises, calculate the value of goodwill on the basis of 4 years purchase of the average profits of 3 years.
- Profits for the years ending 31st December 2016, 2017 and 2018 were ₹ 1,75,000, ₹ 1,50,000 and ₹ 2,00,000 respectively.
- A non-recurring income of ₹ 45,000 is included in the profits of the year 2016.
- The closing stock of the year 2017 was overvalued by ₹ 30,000.
Solution
Calculation of adjusted profit
| Particulars | 2016 (₹) | 2017 (₹) | 2018 (₹) |
| Profit | 1,75,000 | 1,50,000 | 2,00,000 |
| Less: Non-recurring income | 45,000 | - | - |
| 1,30,000 | 1,50,000 | 2,00,000 | |
| Less: Over valuation of closing stock | - | 30,000 | - |
| 1,30,000 | 1,20,000 | 2,00,000 | |
| Add: Over valuation of opening stock | - | - | 30,000 |
| Profit after adjustments | 1,30,000 | 1,20,000 | 2,30,000 |
Average profit = `"Total profit"/"Number of years"`
= `(480000)/3`
= ₹ 1,60,000
Goodwill = Average profit × No. of year purchase
= ₹ 1,60,000 × 4
= ₹ 6,40,000
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