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Goodwill Valuation (Retirement)

On 1st April,...

Question

On 1st April, 2011 on the admission of a new partner, it is agreed that goodwill of the firm is valued at 3 years purchase of average profits for the last five years. The profits for last 5 years have been as follows:
Year ended Profit / (loss)
31st March 2011 16,110
31st March 2012 11,850
31st March 2013 8,145
31st March 2014 (600)
31st March 2015 12,750
Value of goodwill will be _____________.

A

R s .28, 953

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B

R s .29, 673

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C

R s .28, 673

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D

R s .29, 953

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Solution

The correct option is A $R s .28, 953$
Calculation of goodwill :
1. Average profit = Total profit/ No. of years
Average profit = Rs. (16110 + 11850 + 8145 + [-600] + 12750)
Average profit = Rs. 48255/ 5
Average profit = Rs. 9651
2. Goodwill = Average profit * No. of years purchase
Goodwill = Rs. 9651 * 3
Goodwill = Rs. 28953

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