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Calculate the Value of Goodwill. - Accountancy

Sum

Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take Parv into partnership for 1/4th share on 1st April, 2019. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years are:

Year 2014-15 2015-16 2016-17 2017-18 2018-19
Profits (₹) 14,000 15,500 10,000 16,000 15,000

Calculate the value of goodwill.

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Solution

Calculation of Average Profit for Five Years

Year

Profit

2014 – 15

14,000

2015 – 16

15,500

2016 – 17

10,000

2017 – 18

16,000

2018 – 19

15,000

Total Profit

70,500

Average Profit of the Five Years = `[70,500]/5` = Rs. 14,100

Calculation of Average Profit for Four Years

Year

Profit

2015 – 16

15,500

2016 – 17

10,000

2017 – 18

16,000

2018 – 19

15,000

Total Profit

56,500

Average Profit of the Five Years = `[56,500]/5` = Rs. 14,125

Average Profit of four years is taken to compute the value of goodwill of the firm. This is because Average Profit of four years is more than the Average Profit of five years.
∴  Goodwill = Average Profit x Number's of year's purchase
                    = 14,125 x 4 = Rs. 56,500.

  Is there an error in this question or solution?
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APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 3 Goodwill: Nature and Valuation
Exercise | Q 5 | Page 28
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