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Question
The goodwill of a firm is valued at 4 years’ purchase of average profits of last five years. The profits of the last five years were:
| Year | Profit (₹) |
| 2017-18 | 2,00,000 |
| 2018-19 | (3,00,000) |
| 2019-20 | 4,50,000 (including an abnormal gain of ₹ 50,000) |
| 2020-21 | 3,50,000 (after charging an abnormal loss of ₹ 90,000) |
| 2021-22 | 2,60,000 |
Calculate the amount of goodwill.
Numerical
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Solution
Adjust Profits for Abnormal Items:
2017-18 = ₹ 2,00,000
2018-19 = (₹ 3,00,000) (Loss)
2019-20 = ₹ 4,50,000 – ₹ 50,000 (abnormal gain) = ₹ 4,00,000
2020-21 = ₹ 3,50,000 + ₹ 90,000 (abnormal loss added back) = ₹ 4,40,000
2021-22 = ₹ 2,60,000
Adjusted Profits = 2,00,000 – 3,00,000 + 4,00,000 + 4,40,000 + 2,60,000
= ₹ 10,00,000
Average Profit = `(₹ 10,00,000)/5`
= ₹ 2,00,000
Value of Goodwill:
Goodwill = Average Profit × Number of Years’ Purchase
= ₹ 2,00,000 × 4
= ₹ 8,00,000
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