Question

Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2019 for 1/5th share in the future profits. For this purpose, goodwill is to be valued at 100% of the average annual profits of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were:

Year Ended	Profit (₹)
31st March, 2019	2,88,000;
31st March, 2018	1,81,800;
31st March, 2017	1,87,200;
31st March, 2016	2,53,200.

Calculate the value of goodwill.​

Answer 1

Average Profits of Previous three years = `[2,88,000 + 1,81,800 + 1,87,200]/3` = Rs. 2,19,000.

Average Profits of Previous Four years = `[2,88,000 + 1,81,800 + 1,87,200 + 2,53,200 ]/4` = Rs. 2,27,550.
Since, the average profits of previous four years is greater than the average profits of previous three years.
Hence, Goodwill = 100% of Average Profits of Previous four years = ₹2,27,550.