Question

The profit for the five years ending on 31st March, are as follows:
Year 2014–₹ 4,00,000 Year 2015–₹ 3,98,000; Year 2016–₹ 4,50,000; Year 2017–₹ 4,45,000; Year 2018–₹ 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.

Answer 1

$$\begin{gathered} \mathrm{Goodwill}=\mathrm{Average}\mathrm{Profits}\times \mathrm{Number}\mathrm{of}\mathrm{Years}\text{'}\mathrm{Purchase} \\ \begin{array}{c}\begin{array}{rcl}\mathrm{Average}\mathrm{Profits}& =& \frac{\mathrm{Total}\mathrm{Profits}}{\mathrm{Number}\mathrm{of}\mathrm{Years}}\\ & =& \frac{4,00,000+3,98,000+4,50,000+4,45,000+5,00,000}{5}\\ & =& \frac{21,93,000}{5}=\mathrm{Rs}4,38,600\end{array}\end{array} \\ \mathrm{Goodwill}=4,38,600\times 4=\mathrm{Rs}17,54,400 \end{gathered}$$