Question

Divya purchased Jyoti's business with effect from 1st April, 2019. Profits shown by Jyoti's business for the last three ​financial years were:

2016-17	:	₹ 1,00,000 (including an abnormal gain of ₹ 12,500).
2017-18	:	₹ 1,25,000 (after charging an abnormal loss of ₹ 25,000).
2018-19	:	₹ 1,12,500 (excluding ₹ 12,500 as insurance premium on firm's property- now to be insured).

Calculate the value of firm's goodwill on the basis of two year's purchase of the average profit of the last three years.

Answer 1

Normal Profit for the year 2016-17= (Total Profit - Abnormal Gain)= ₹$\left(1,00,000-12,500\right)=₹87,500$
Normal Profit for the year 2017-18= (Total Profit + Abnormal Loss)= $₹\left(1,25,000+25,000\right)=₹1,50,000$
Normal Profit for the year 2018-19= (Total Profit - Indirect Expenses)= $₹\left(1,12,500-12,500\right)=₹1,00,000$
$\mathrm{Average}\mathrm{Profits}=\frac{(\mathrm{Normal}\mathrm{Profits}\mathrm{for}2016-17)+(\mathrm{Normal}\mathrm{Profits}\mathrm{for}2017-18)+(\mathrm{Normal}\mathrm{Profits}\mathrm{for}2018-19)}{3}$
$\mathrm{Average}\mathrm{Profits}=\frac{87,500+1,50,000+1,00,000}{3}=₹1,12,500$
$$\begin{gathered} \mathrm{Goodwill}=\mathrm{Average}\mathrm{Profits}\mathrm{of}\mathrm{last}\mathrm{three}\mathrm{years}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase} \\ \mathrm{Goodwill}=₹\left(1,12,500\times 2\right)=₹2,25,000 \end{gathered}$$