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.

Calculate the value of goodwill.

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Solution

Average Profits of Previous three years= $\frac{2, 88, 000 + 1, 81, 8000 + 1, 87, 200}{3} = ₹ 2, 19, 000$
Average Profits of Previous four years= $\frac{2, 88, 000 + 1, 81, 800 + 1, 87, 200 + 2, 53, 200}{4} = ₹ 2, 27, 550$
Since, the average profits of previous four years is greater than the average profits of previous three years.
Hence, Goodwill = 100% of Average Profits of Previous four years = ₹2,27,550

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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.