Question

Calculate the value of goodwill as on 1st April, 2025, on the basis of `2 1/2` year’s purchase of the average profits of the last five years. The profits and losses for the years ending 31st March were: 2020 ₹ 80,000; 2021 ₹ 1,00,000; 2022 Loss ₹ 30,000; 2023 ₹ 1,70,000; 2024 ₹ 1,60,000 and 2025 ₹ 1,80,000.

You are informed that the profits of the year ending 31st March 2024 included profit on sale of a fixed asset amounting to ₹ 50,000 and the profits for the year 2025 were affected by a loss due to fire amounting to ₹ 20,000.

Hint: Profit for the year 2020 will be ignored.

Answer 1

Calculation of Adjusted profits for the purpose of goodwill:

2021 = ₹ 1,00,000

2022 = ₹ (30,000)

2023 = ₹ 1,70,000

2024 = ₹ 1,60,000 − ₹ 50,000 (profit on sale of a fixed asset)

= ₹ 1,10,000

2025 = ₹ 1,80,000 + ₹ 20,000 (loss due to fire)

= ₹ 2,00,000

Calculation of goodwill of the firm:

Average profit of last 5 years = `(1,00,000 − 30,000 + 1,70,000 + 1,10,000 + 2,00,000)/5`

= `(5,50,000)/5`

= 1,10,000

Goodwill = `"Average profit of last 5 years" xx 2 1/2 "year’s purchase"`

= `1,10,000 xx 2 1/2`

= `1,10,000 xx 5/2`

= ₹ 2,75,000