Question

Meena purchased Simmi's business from 1st April, 2015. The Profits disclosed by Simmi's Business for the last three years were as follows :

Year ending 31st March 2013 - Rs 40,000 (Including an Abnormal gain of Rs 5,000)

Year ending 31st March 2014 - Rs 50,000 (After charging an Abnormal Loss of Rs 10,000)

Year ending 31st March 2015 - Rs 45,000 (Excluding Rs 5,000 as annual Insurance Premium of firm's Property now Insured)

Calculate the Value of firm's goodwill on the basis of 2 years Purchase of the average Profit for the last three years.

Answer 1

Valuation of Goodwill

$\begin{array}{cccc}& \text{Rs}& & \text{Rs}\\ \text{Profit for the year ending 31st March,2013}& 40,000& & \\ \text{Less:Abnormal gain}& \underset{–}{5,000}& & 35,000\\ \text{Profit for the year ending 31st March,2014}& 50,000& & \\ \text{Add:Abnormal Loss}& \underset{–}{10,000}& & 60,000\\ \text{Profit for the year ending 31st March, 2015}& & & 45,000\\ \text{Toal Profit}& & & \underset{–}{\overline{1,40,000}}\\ \text{Average Profit}\frac{1,40,000}{3}=& & & 46,667\\ \text{Less: Annual Insurance Premium}& & & 5,000\\ & & & \underset{–}{\overline{41,667}}\end{array}$

Goodwill at 2 year's purchase $=Rs41,667\times 2=Rs83,334$.

Note: Insurance Premium of 5,000 is recurring expenses. It is to be paid in future also. Hence, it is deducted from average profits.