Question

Divya Purchased Jyoti's Business With Effect From 1st April 2019. Calculate The Value Of The Firm's Goodwill On The Basis Of Two Years Purchase Of The Average Profit Of The Last Three Years

Answer 1

Given:

Profits Shown By Jyoti’s Business For The Last Three Financial Years Were:

2016-17: ₹1,00,000 (Including An Abnormal Gain Of ₹ 12,500).

2017-18: ₹1,25,000 (After Charging An Abnormal Loss Of ₹ 25,000)

2018-19: ₹1,12,500 (Excluding ₹ 12,500 As Insurance Premium On Firm’s Property – Now To Be Insured).

Normal profit for the year 2016-2017 = (Total profit – Abnormal Gain)

= Rs.1,00,000 – Rs.12,500 = Rs.87,500.

Normal profit for the year 2017-2018 = (Total profit + Abnormal Loss)

= Rs.1,25,000 + Rs.25,000 = Rs.1,50,000.

Normal profit for the year 2018-2019 = (Total profit – Indirect Expenses)

= Rs.1,12,500 – Rs.212,500 = Rs.1,00,000.

frac{Average Profits = (Normal profit for the year 2016-2017) + (Normal profit for the year 2017-2018) + (Normal profit for the year 2018-2019)}{3}

> frac{Rs. 87,500 + Rs. 1,50,000 + Rs. 1,00,000}{3}

> frac{Rs. 3,37,500}{3}

> Rs. 1,12,500

Goodwill = Average profits of last three years * Number of years of purchase

Goodwill = Rs. 1,12,500 * 2

Goodwill = Rs. 2,25,000.