Question

A and B are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take C into partnership for 1/5th share on 1st April 2017. For this purpose goodwill is to be valued at 80% of the average annual profits of the previous three or four years, whichever is higher.
The average profits for the last four years are :
`{:(,," Rs."),("Year ending on 31st March 2014",,"98,000"),("Year ending on 31st March 2015",,"80,000"),("Year ending on 31st March 2016",,"76,000"),("Year ending on 31st March 2017",,"1,20,000"):}`
Calculate the value of Goodwill.

Answer 1

$\frac{1}{4}$Answer:

The average profits for the last four years the value of Goodwill.

Explanation:

(a) Average profit for five years= [14000+15500+10000+16000+15000]/ 5

                                                   = 14100

(b) Average profit for four years= [15000+16000+10000+15500] \$\frac{1}{4}$

                                                    = 14125

(b) > (a). Hence, average profit= 14125

Step 2: Calculation of Goodwill

Goodwill= 14125 x 4

              = 56500

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