7. A and B are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take into
partnership for 1/4th share on 1st April, 2018. For this purpose, goodwill is to be valued at four times
the average annual profit of the previous four or five years whichever is higher. The agreed profits for
goodwill purpose of the past five years are:
Year
2013-14
2014-15
2015-16
2016-17
2017-18
Profit (5)
14,000
15,500
10,000
16,000
15.000
Find the value of goodwilt.
Answers
Answer:
Step 1: Calculation of Average Profit
(a) Average profit for five years= [14000+15500+10000+16000+15000]/ 5
= 14100
(b) Average profit for four years= [15000+16000+10000+15500]/ 4
= 14125
(b) > (a). Hence, average profit= 14125
Step 2: Calculation of Goodwill
Goodwill= 14125 * 4
= 56500. it is right answer
Given:
- A and B are partners in a firm, sharing profits and losses in the ratio 2:1.
- They decide to admit a new partner in for 1/4th share.
- The goodwill is to be valued at 4 times the average profit for the previous four or five years, whichever is higher.
- The profits for the previous five years are Rs 14,000, Rs 15,500, Rs 10,000, Rs 16,000 and Rs 15,000.
To find: The value of goodwill.
Answer:
Calculation of average profit for the previous 4 years:
Average profit = Total profit ÷ Number of years
- Total profit = Rs 15,000 + Rs 16,000 + Rs 10,000 + Rs 15,500 = Rs 56,500
- Number of years = 4
Average profit = Rs 56,500 ÷ 4
Average profit = Rs 14,125
Calculation of the average profit for the previous 5 years:
Average profit = Total profit ÷ Number of years
- Total profit = Rs 15,000 + Rs 16,000 + Rs 10,000 + Rs 15,500 + Rs 14,000 = Rs 70,500
- Number of years = 5
Average profit = Rs 70,500 ÷ 5
Average profit = Rs 14,100
Since the average profit for the previous 4 years is higher, it will be considered to calculate the goodwill.
Goodwill = Average profit × Number of years' purchase
Goodwill = Rs 14,125 × 4
Goodwill = Rs 56,500
Therefore, the value of goodwill is Rs 56,500.