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Question
Calculate the value of goodwill at 2 year’s purchase of the average profits of the last 3 years. The profit for the first year was ₹ 50,000, for second year twice the profit of first year and for the third year one and half times the profit of the second year.
Numerical
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Solution
Given:
1st Year Profit = ₹ 50,000
2nd Year Profit = Twice 1st Year
= 2 × 50,000
= ₹ 1,00,000
3rd Year Profit
= 1.5 × 2nd Year
= 1.5 × 1,00,000
= ₹ 1,50,000
Total Profits of 3 years = 50,000 + 1,00,000 + 1,50,000
= ₹ 3,00,000
Average Profit = `(3,00,000)/3`
= ₹ 1,00,000
Goodwill = Average Profit × No. of years’ purchase
= 1,00,000 × 2
= ₹ 2,00,000
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