Question

The profits of last five years are $Rs.85,000$, $Rs.90,000$; $Rs.70,000$; $Rs.1,00,000$ and $Rs.80,000$. Find the value of goodwill, if it is calculated on average profits of last five years on the basis of $3$ years of purchase.

• A. $Rs.85,000$
• B. $Rs.2,55,000$
• C. $Rs.2,75,000$
• D. $Rs,2,85,000$

Answer 1

The correct option is B $Rs.2,55,000$

Calculation of goodwill :

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

Average profit = Rs. (85000 + 90000 + 70000 + 100000 + 80000)/ 3

Average profit = Rs. 425000/ 5

Average profit = Rs. 85000

2. Goodwill = Average profit * No. of years purchase

Goodwill = Rs. 85000 * 3

Goodwill = Rs. 255000