Question

X purchased the business of Y from 1st April, 2024. For this purpose goodwill is to be valued at 100% of the average annual profits of the last four years. The profits shown by Y’s business for the last four years were:

Year ended	(₹)
31st March, 2021	Profit: 1,00,000 (after debiting loss of stock by fire ₹ 50,000)
31st March, 2022	Loss: 1,50,000 (includes voluntary retirement compensation paid ₹ 80,000)
31st March, 2023	Profit: 1,50,000
31st March, 2024	Profit: 2,00,000

Verification of books of accounts revealed the following:

1. During the year ended 31st March, 2022, a machine got destroyed in accident and ₹ 60,000 was written off as loss in Profit and Loss Account.
2. On 1st July 2022, Two Computers costing ₹ 40,000 each were purchased and were debited to Travelling Expenses Account on which depreciation is to be charged @ 10% p.a. on Straight Line Method.

Calculate the value of goodwill.

Hint: Profit for the year ended 31st March 2023 ₹ 2,24,000 and for 2024 ₹ 1,92,000.

Answer 1

Calculation of goodwill of the firm:

Profits of the firm for the valuation of goodwill:

1st year = 1,00,000 + 50,000 = ₹ 1,50,000

2nd year = (1,50,000) + 80,000 + 60,000

= (1,50,000) + 1,40,000

= ₹ (10,000)

3rd year = `1,50,000 + (40,000 × 2) − (80,000 xx 10/100 xx 9/12)`

= 1,50,000 + 80,000 − 6,000

= ₹ 2,24,000

4th year = 2,00,000 − 8,000

= ₹ 1,92,000

Average profit of the last 4 year’s = `(1,50,000 −10,000 + 2,24,000 + 1,92,000)/4`

= `(5,56,000)/4`

= ₹ 1,39,000

Goodwill of the firm = Average profit of the last 4 year’s × 100%

= 1,39,000 × 100%

= ₹ 1,39,000