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Average Profit Method

Akanksha, Che...

Question

Akanksha, Chetna, and Dipanshu are partners in the firm sharing profits and losses in the ratio of 3:2:1. They decide to take Jatin into the partnership for 1/5 share in the future profits. For this purpose, goodwill is to be valued at 2 times the average annual profits of the previous four years. The average profits for the past four years were:

2008 - Rs. 96,000

2009 - Rs. 60,600

2010 - Rs. 62,400

2011 - Rs. 84,400

Calculate the value of goodwill.

A

Rs. 1,75,100

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B

Rs. 1,57,100

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C

Rs. 1,71,500

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D

Rs. 1,51,700

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Solution

The correct option is D
Rs. 1,51,700

Total Profit = Rs. 96,000 + Rs. 60,600 + Rs. 62,400 + Rs. 84,400 = Rs. 3,03,400

Average Profit = Total Profit/No. of Years

Average profit = Rs. 3,03,400/4 = Rs. 75,850

Goodwill = Average Profit x Number of Years of Purchase

Goodwill = Rs. 75,850 * 2 = Rs. 1,51,700

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A

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^{t h}

1^{s t}

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

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Q. Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2019 for 1/5th share in the future profits. For this purpose, goodwill is to be valued at 100% of the average annual profits of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were:

Year Ended	Profit (₹)
31st March, 2019	2,88,000;
31st March, 2018	1,81,800;
31st March, 2017	1,87,200;
31st March, 2016	2,53,200.

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Q. Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take Parv into partnership for 1/4th share on 1st April, 2019. 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 profits for goodwill purpose of the past five years are:

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Q. A and B are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take C into partnership for 1/4th share on 1st 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 profits for goodwill purpose of the past five years are:

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X

Y

are partners sharing profit and losses in the ratio

3 : 2

Z

into partnership for

1 / 4^{t h}

share in goodwill.

Z

brings in his goodwill in cash. Goodwill for this purpose is to be calculated at two years purchase of the average normal profit of past three years. Profit of the last three years ended

31^{s t}

March, were:
2016--Profit Rs.

50, 000

(including profit on sale of asset Rs.

5, 000

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2017--Loss rs.

20, 000

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2018--Profit Rs.

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