Calculate the value of firm's goodwill on the basis of one and half years' purchase of the average profit of the last three years. The profit for first year was ₹ 1,00,000, profit for the second year was twice the profit of the first year and for the third year profit was one and half times of the profit of the second year.

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Solution

$\begin{array}{l} Goodwill = Average Profit \times No. of years' purchase \\ = 2,00,000 \times 1.5 = Rs 3,00,000 \end{array}$

Working Notes:

WN: 1 Calculation of Profits of last three years

Year

Profit

1^st Year

1,00,000

2^nd Year

2,00,000 (1,00,000 $\times$ 2)

3^rd Year

3,00,000 (2,00,000 $\times$ 1.5)

Total Profit

6,00,000

WN: 2 Calculation of Average Profit

$\begin{array}{l} Average Profit = \frac{Total Profits for past given years}{Number of Years} \\ = \frac{6, 00, 000}{3} = Rs 2,00,000 \end{array}$

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Year	Profit
1^st Year	1,00,000
2^nd Year	2,00,000 (1,00,000 $\times$ 2)
3^rd Year	3,00,000 (2,00,000 $\times$ 1.5)
Total Profit	6,00,000