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Question
The profits earned by a firm during the last four years were as follows:
| Year ended 31st March | Profit (₹) |
| 2019 | 80,000 |
| 2020 | 1,00,000 |
| 2021 | 1,10,000 |
| 2022 | 1,50,000 |
Calculate the value of goodwill on the basis of three year’s purchase of weighted average profits. Weights to be used are 1, 2, 3 and 4 respectively to the profits for 2019, 2020, 2021 and 2022.
Numerical
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Solution
| Year | Profit (₹) | Weight | Product (Profit × Weight) |
| 2019 | 80,000 | 1 | 80,000 |
| 2020 | 1,00,000 | 2 | 2,00,000 |
| 2021 | 1,10,000 | 3 | 3,30,000 |
| 2022 | 1,50,000 | 4 | 6,00,000 |
Total of Products = 12,10,000
Total of Weights = 1 + 2 + 3 + 4 = 10
Calculate Weighted Average Profit:
Weighted Average Profit `= "Total of Products"/"Total of Weights"`
`= (12,10,000)/10`
= 1,21,000
Goodwill is to be valued at 3 years’ purchase of weighted average profit:
Goodwill = 1,21,000 × 3
= 3,63,000
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