Question

A, B and C are partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. They decide to take D into partnership for `1/4`th share on 1st April, 2022. For this purpose, goodwill is to be valued at 3 times the average annual profits of the previous four or five years whichever is higher. The agreed profits for goodwill purpose of the past five years are as follows:

	₹
Year ending on 31st March 2018	1,30,000
Year ending on 31st March 2019	1,20,000
Year ending on 31st March 2020	1,50,000
Year ending on 31st March 2021	1,10,000
Year ending on 31st March 2022	2,00,000

Calculate the value of Goodwill.

Answer 1

For last 5 years (2018 to 2022):

1,30,000 + 1,20,000 + 1,50,000 + 1,10,000 + 2,00,000

= 7,10,000

Average (5 years) `= (7,10,000)/5`

= 1,42,000

For last 4 years (2019 to 2022):

1,20,000 + 1,50,000 + 1,10,000 + 2,00,000

= 5,80,000

Average (4 years) `= (5,80,000)/4`

= 1,45,000

Goodwill is to be valued at 3 times the average annual profit.

Goodwill = 3 × Higher average profit

Goodwill = 3 × 1,45,000 

= 4,35,000