Question

From the following information relating to a partnership firm, find out the value of its goodwill based on 3 years purchase of average profits of the last 4 years:

1. Profits of the years 2015, 2016, 2017 and 2018 are ₹ 10,000, ₹ 12,500, ₹ 12,000 and ₹ 11,500 respectively.
2. The business was looked after by a partner and his fair remuneration amounts to ₹ 1,500 per year. This amount was not considered in the calculation of the above profits.

Answer 1

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

= `(10,000 + 12,500 + 12,000 + 11,500)/4`

= `(46,000)/4`

= ₹ 11,500

Particulars	₹
Average profit before adjusting four remunerations to the partner	11,500
Less: Remuneration to the partner	1,500
Average Profit	10,000

Valuation of goodwill = Average profit × No. of years purchase

= ₹ 10,000 × 3

= ₹ 30,000