Question

Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years? The profits for the last five years were as follows:

	Rs
2013	40,000
2014	50,000
2015	60,000
2016	50,000
2017	60,000

Answer 1

Average Profit =

Year	Profit
2013	40,000
2014	50,000
2015	60,000
2016	50,000
2017	60,000
Sum of 5 years profit	2,60,000

Average Profit = = 52,000

Goodwill = Average Profit × Number of Year’s Purchases = 52,000 × 4 = Rs 2,08,000