Question

$A$ and $B$ partners in a firm sharing profits and losses in the ratio of $2:1$. They decide to take $C$ into partnership for $1/4^{th}$ share on $1^{st}$ April,2018. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years whichever is higher. The agreed profit for goodwill purpose of the past five years are:

Year	2013-14	2014-15	2015-16	2016-17	2017-18
Profit(Rs.)	14,000	15,500	10,000	16,000	15,000

Find the value of Goodwill.

Answer 1

Step 1: Calculation of Average Profit

(a) Average profit for five years= [14000+15500+10000+16000+15000]/ 5

= 14100

(b) Average profit for four years= [15000+16000+10000+15500]/ 4

= 14125

(b) > (a). Hence, average profit= 14125

Step 2: Calculation of Goodwill

Goodwill= 14125 * 4

= 56500