Question

Profits for the five years ending on 31st March, are as follows:
Year 2015 − ₹ 4,00,000; Year 2016 − ₹ 3,98,000; Year 2017 − ₹ 4,50,000; Year 2018 − ₹ 4,45,000 and Year 2019 − ₹ 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.

Answer 1

Goodwill = Average Profit x Number's of year's purchase

Average Profit = `"Total Profits"/"Number of Years"`

= `[4,00,000 + 3,98,,000 + 4,50,000 + 4,45,000 + 5,00,000 ]/5`

= `[ 21,93,000]/5`

= Rs. 4,38,600

Number of years’ purchase = 4

∴ Goodwill = 4,38,600 × 4

= Rs. 17,54,400.