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Question
Profits for the five years ending on 31st March, are as follows:
Year 2015 − ₹ 4,00,000; Year 2016 − ₹ 3,98,000; Year 2017 − ₹ 4,50,000; Year 2018 − ₹ 4,45,000 and Year 2019 − ₹ 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.
Solution
Goodwill = Average Profit x Number's of year's purchase
Average Profit = `"Total Profits"/"Number of Years"`
= `[4,00,000 + 3,98,,000 + 4,50,000 + 4,45,000 + 5,00,000 ]/5`
= `[ 21,93,000]/5`
= Rs. 4,38,600
Number of years’ purchase = 4
∴ Goodwill = 4,38,600 × 4
= Rs. 17,54,400.
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