Question

4. Profits of the last three years were 6,000, 13,000
and 8,000 respectively. Goodwill at two years pur-
chase of the average net profit will be :
​

Answer 1

Answer:

Given :

Profits Of last 3 years = 6,000 , 13,000 + 8,000

No.of Year's Of Purchase = 2 years

To Find :

Goodwill

Formula To Find Goodwill :

${\boxed{\underline{\bf{Goodwill \: =Average \: Profits \: \times N.o.of \: years \: Purchase \: }}}}$

${\boxed{\underline{\bf{Average \: Profits \: = \frac{Total \: Profits}{No.of \: years}}}}}$

Solution :

$\sf \to \: averge \: profits \: = \frac{6000 + 13000 + 8000}{3}$

$\sf \to \: \frac{19000 + 8000}{3}$

$\sf \to \: \frac{27000}{3}$

$\sf \to \bf \: 9000$

Average Profits = 9000

$\sf \to \: Goodwill \: = 9000 \times 2$

$\bf \to \: 18000$

$\therefore \sf \: Value \: of \: Goodwill \: = 18000$

Average Profits Method :

Under this method, the goodwill is valued at agreed no. of years purchase of the average Profits of the past few years. It is based on the assumption that a new business will not be able to earn any profits during the first few years of its Operation. The goodwill , therefore should be calculated by multiplying the past average Profits by no. of years during which the anticipated profits are expected to accrue.