Question

The following trading results are available in respect of the business carried on by a firm:
2001 Loss Rs.10,000
2002 Loss Rs.5,000
2003 Profit Rs.80,000
2004 Profit Rs.55,000
The value of goodwill on the basis of 5 years' purchase of average profit of the business will be ___________.

• A. $Rs.1,25,000$
• B. $Rs.1,50,000$
• C. $Rs.1,00,000$
• D. $Rs.1,20,000$

Answer 1

The correct option is B $Rs.1,50,000$

Calculation of goodwill :

1. Average profit = Total profit/ No. of years

Average profit = Rs. (-10000 + [-5000] + 80000 + 55000 ) / 4 years

Average profit = Rs. 120000 / 4 years

Average profit = Rs. 30000

2. Goodwill = Average profit * No. of year's purchase

Goodwill = Rs. 30000 * 5 years

Goodwill = Rs. 150000