Question

Calculate the value of goodwill at 3 years’ purchase of the average profits of the last 4 years. The profit for the first year was ₹ 50,000, for second year twice the profit of the first year and for the third year one and half times the profit of the second year. The profit of the fourth year was 1.6 times the profit of the third year.

Answer 1

Valuation of Goodwill:

		₹
Profit for Ist Year		50,000
Profit for IInd Year	\[= ₹50,000 \times 2\]	1,00,000
Profit for IIIrd Year	$= ₹1,00,000 \times 1.5$	1,50,000
Profit for IVth Year	$= ₹1,50,000 \times 1.6$	2,40,000
	Total Profits	5,40,000

$$\text{Average Profit} = \frac{5,40,000}{4} = ₹1,35,000$$

$$\begin{aligned} \text{Goodwill} & = \text{Average Profit} \times \text{No. of Years' Purchase} \\ & = ₹1,35,000 \times 3 = ₹4,05,000 \end{aligned}$$