Question

Divya purchased Jyoti's business with effect from 1st April, 2019. 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).

Calculate the value of firm's goodwill on the basis of two year's purchase of the average profit of the last three years.

Answer 1

Normal Profit for the year 2016-17= (Total Profit - Abnormal Gain)= ₹ ( 1,00,000 - 12,500 ) = ₹ 87,500.

Normal Profit for the year 2017-18= (Total Profit + Abnormal Loss)= ₹ ( 1,25,000 + 25,000 ) = ₹ 1,50,000 

Normal Profit for the year 2018-19= (Total Profit - Indirect Expenses)= ₹ ( 1,12,500 - 12,500) = ₹ 1,00,000

Average Profits = `[( "Normal Profits for 2016 -17") + ("Normal Profits for 2017 -18") + ("Normal Profits for 2018 -19")]/3`

Average Profits = `[87,500 +1,50,000 + 1,00,000]/3` = Rs. 1,12,500

Goodwill = Average Profits of last three years x No. of Years of Purchase

Goodwill = Rs.( 1,12,500 x 2 ) = Rs. 2,25,000.