Question

The following particulars are available in respect of the business carried on by a partnership firm:

1. Profits earned: 2016: ₹ 25,000; 2017: ₹ 23,000 and 2018: ₹ 26,000.
2. Profit of 2016 includes a non-recurring income of ₹ 2,500.
3. Profit of 2017 is reduced by ₹ 3,500 due to stock destroyed by fire.
4. The stock was not insured. But, it is decided to insure the stock in the future. The insurance premium is estimated to be ₹ 250 per annum.

You are required to calculate the value of goodwill of the firm on the basis of 2 years purchase of average profits of the last three years.

Answer 1

Calculation of adjusted profit

Particulars	2016 (₹)	2017 (₹)	2018 (₹)
Profit	25,000	23,000	26,000
(−) Non-recurring income	2,500	-	-
	22,500	23,000	26000
(+) Stock destroyed fire	-	3,500	-
	22,500	26,500	26,000
(−) Insurance premium	250	250	250
Profit after adjustments	22,250	26,250	25,750

Total profit = 22,250 + 26,250 + 25,750 = ₹ 74,250

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

= `(74250)/3`

= ₹ 24,750

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

= ₹ 24,750 × 2

= ₹ 49,500