Question

The profits of a firm for the year ended ${31}^{st}$ March for the last five years were as follows:

$\begin{array}{cc}\text{Year}& \text{Profit (in Rs)}\\ 1999& 20,000\\ 2000& 24,000\\ 2001& 30,000\\ 2002& 25,000\\ 2003& 18,000\end{array}$

Calculate the value of goodwill on the basis of $3$ year's purchase of weighted average profit after weights $1,2,3,4$ and $5$ respectively.

Answer 1

$\begin{array}{cccc}\text{Year}& \text{Profit}& \text{Weights}& \text{Product}\\ & & & \text{(Profit}\times \text{Weight)}\\ 1999& 20,000& 1& 20,000\\ 2000& 24,000& 2& 48,000\\ 2001& 30,000& 3& 90,000\\ 2002& 25,000& 4& 1,00,000\\ 2003& 18,000& 5& 90,000\\ & & \text{Total=15}& 3,48,000\end{array}$

Weighted Average Profit $=\frac{\text{Total product weight}}{\text{Total weight}}=\frac{3,48,000}{15}=\text{Rs}23,200$

Goodwill $=$ Weighted average profit $\times$ No. of year's Purchase $=3\times 23,200=\text{Rs}69,600$