Question

1st year – Rs. 3,000 (including gain on sale of fixed asset Rs. 1,000)
2nd year – Rs. 7,000 (excluding Rs. 2,000 as insurance premium)
3rd year – Rs. 2,000 (after debiting loss due to fire Rs. 1,000)
4th year – Rs. 5,000
5th year – Rs. 5,000 (includes voluntary retirement compensation of Rs. 1,000)
6th year- Rs. 1,000 (Loss)
Calculate the amount of Goodwill on the basis of 3 years' purchase of last 6 years profits and losses.

Answer 1

ANSWER :

• ❖ If Profit for 1st year – Rs. 3,000 (including gain on sale of fixed asset Rs. 1,000); Profit for 2nd year – Rs. 7,000 (excluding Rs. 2,000 as insurance premium); Profit for 3rd year – Rs. 2,000 (after debiting loss due to fire Rs. 1,000); Profit for 4th year – Rs. 5,000; Profit for 5th year – Rs. 5,000 (includes voluntary retirement compensation of Rs. 1,000) and Loss for 6th year – Rs. 1,000; then the amount of Goodwill on the basis of 3 years' purchase of average profit of last 6 years profits and losses will be Rs. 9,999.99 or Rs. 10,000 (Approx).

____________________________________________________________

SOLUTION :

❒ Given :-

• Profit for 1st year – Rs. 3,000 (including gain on sale of fixed asset Rs. 1,000)

• Profit for 2nd year – Rs. 7,000 (excluding Rs. 2,000 as insurance premium)

• Profit for 3rd year – Rs. 2,000 (after debiting loss due to fire Rs. 1,000)

• Profit for 4th year – Rs. 5,000

• Profit for 5th year – Rs. 5,000 (includes voluntary retirement compensation of Rs. 1,000)

• Loss for 6th year – Rs. 1,000

❒ To Calculate :-

• Amount of Goodwill on the basis of 3 years' purchase of Average Profit last 6 years profits and losses = ?

❒ Calculation :-

Here,

• Profit for 1st year = Rs. 3,000 (including gain on sale of fixed asset Rs. 1,000)

∴ Actual Profit for 1st year = Rs. 3,000 - Rs. 1,000

➨ Actual Profit for 1st year = Rs. 2,000

• Profit for 2nd year = Rs. 7,000 (excluding Rs. 2,000 as insurance premium)

∴ Actual Profit for 2nd year = Rs. 7,000 - Rs. 2,000

➨ Actual Profit for 2nd year = Rs. 5,000

• Profit for 3rd year = Rs. 2,000 (after debiting loss due to fire Rs. 1,000)

∴ Actual Profit for 3rd year = Rs. 2,000 + Rs. 1,000

➨ Actual Profit for 3rd year = Rs. 3,000

• Profit for 4th year = Rs. 5,000

∴ Actual Profit for 4th year = Rs. 5,000

• Profit 5th year = Rs. 5,000 (includes voluntary retirement compensation of Rs. 1,000)

∴ Actual Profit for 5th year = Rs. 5,000 + Rs. 1,000

➨ Actual Profit for 5th year = Rs. 6,000

• Loss for 6th year = Rs. 1,000

∴ Actual Loss for 6th year = Rs. 1,000

So,

• ✠ Total Profit = Actual Profit for 1st year + Actual Profit for 2nd year + Actual Profit for 3rd year + Actual Profit for 4th year + Actual Profit for 5th year - Actual Loss for 6th year

➜ Total Profit = Rs. 2,000 + Rs. 5,000 + Rs. 3,000 + Rs. 5,000 + Rs. 6,000 - Rs. 1,000

➜ Total Profit = Rs. 20,000

Here,

• Total Profit = Rs. 20,000

• No. of Years = 6 years

So,

• ★ Average Profit = $\rm{ \dfrac{ \: Total \: \: Profit \: }{ \: No. \: \: of \: \: years \: }}$

➜ Average Profit = $\rm{ \dfrac{ \: Rs. 20,000 \: }{ \: 6\: }}$

➜ Average Profit = Rs. 3,333.33

Now,

• Average Profit = Rs. 3,333.33

• No. of years' purchase = 3 years

Hence,

• ✪ Value of Goodwill = Average Profit × No. of years' purchase

⇒ Value of Goodwill = Rs. 3,333.33 × 3

⇒ Value of Goodwill = Rs. 9,999.99

∴ Value of Goodwill = Rs. 10,000 (Approx.)