Question

From the following information relating to Sridevi enterprises, calculate the value of goodwill on the basis of 4 years purchase of the average profits of 3 years.

1. Profits for the years ending 31^st December 2016, 2017 and 2018 were ₹ 1,75,000, ₹ 1,50,000 and ₹ 2,00,000 respectively.
2. A non-recurring income of ₹ 45,000 is included in the profits of the year 2016.
3. The closing stock of the year 2017 was overvalued by ₹ 30,000.

Answer 1

Calculation of adjusted profit

Particulars	2016 (₹)	2017 (₹)	2018 (₹)
Profit	1,75,000	1,50,000	2,00,000
Less: Non-recurring income	45,000	-	-
	1,30,000	1,50,000	2,00,000
Less: Over valuation of closing stock	-	30,000	-
	1,30,000	1,20,000	2,00,000
Add: Over valuation of opening stock	-	-	30,000
Profit after adjustments	1,30,000	1,20,000	2,30,000

Average profit = `"Total profit"/"Number of years"`

= `(480000)/3`

= ₹ 1,60,000

Goodwill = Average profit × No. of year purchase

= ₹ 1,60,000 × 4

= ₹ 6,40,000