Question

9. Tarang purchased Jyoti's business with effect from 1st April, 2021. Profits shown by Jyoti's business for
the last three financial years ended 31st March, were:
: 1,00,000 (including an abnormal gain of * 12,500).
: 1,25,000 (after charging an abnormal loss of 25,000).
: *1,12,500 (excluding 12,500 as insurance premium on firm's property-now to be insured).
Calculate the value of firm's goodwill on the basis of two years' purchase of the average profit of the last
three years.
[Ans.: Goodwill —* 2,25,000.)
2019
2020
2021

Answer 1

Answer:

The value of the firm's goodwill on the basis of two years' purchase of the average profit of the last three years is 2,25,000.

Explanation:

Given:

Tarang purchased Jyoti's business with effect from 1st April 2021. Profits are shown by Jyoti's business for

the last three financial years ended 31st March, were:

: 1,00,000 (including an abnormal gain of * 12,500).

: 1,25,000 (after charging an abnormal loss of 25,000).

: *1,12,500 (excluding 12,500 as insurance premium on firm's property-now to be insured).

To find:

The value of the firm's goodwill on the basis of two years' purchase of the average profit of the last three years.

$\begin{center}\begin{tabular}{ |c| c| c| c|} \textbf{Year}& \textbf{Profit} & \textbf{Adjustment}& \textbf{Normal profile} \\ 2019& 100000 & 12500&87500 \\ 2020&125000&25000&150000\\ 2021 & 112500 & 12500&100000 \end{tabular}\end{center}$

Average profit = $\frac{337500}{3}=1,12,500.$

Goodwill = 1,12,500 x 2

                = 2,25,000

Therefore, The value of the firm's goodwill on the basis of two years' purchase of the average profit of the last three years is 2,25,000.

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Answer 2

The value of the goodwill of the firm on the basis of two years' purchased by the average profit for the last three years will be Rs.2,25,000.

GIVEN: Tarang purchased Jyoti's business with effect from 1st April 2021. Profits are shown by Jyoti's business.

TO FIND Goodwill of the firm.

SOLUTION:

As we are given the profits of three years are as follows,

Year 1 : 1,00,000 (including an abnormal gain of * 12,500).

Year 2 : 1,25,000 (after charging an abnormal loss of 25,000).

Year 3 : *1,12,500 (excluding 12,500 as insurance premium on firm's property-now to be insured).

As we know,

Goodwill refers to the monetary value of the reputation earned or establishes by the company over year.

Goodwill refers to the average profit of all three years multiplied by the number for how many years that is to be calculated.

Goodwill = 1,12,500 x 2

              = 2,25,000

Implying that, The value of the firm's goodwill based on two years' purchase of the average profit of the last three years is 2,25,000.

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