A,B and C are partnere in a firm sharing profits and losses in the ratio of 3:2:1. They decided to take D into partnership for 1/4th share on 1st April,2017. For previous four or five years whichever is higher. The agreed profits for goodwill purpose of the past five years are as follows. Calculate the value of goodwill.
Answers
Correct question:
A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1. They decide to take D into the partnership for 1/4th share on 1st April, 2017. For this purpose, goodwill is to be valued at 3 times the average annual profits of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years are as follows:
- 2013 - Rs 1,30,000
- 2014 - Rs 1,20,000
- 2015 - Rs 1,50,000
- 2016 - Rs 1,10,000
- 2017 - Rs 2,00,000
Calculate the value of goodwill.
Answer:
We first need to find which average profit is higher, i.e., whether the first four years' average profit is higher or all five years' average profit is higher.
Average profit = Total profit ÷ Number of years
Average profit for the first four years:
Total profit = Rs 1,30,000 + Rs 1,20,000 + Rs 1,50,000 + Rs 1,10,000 = Rs 5,10,000
Number of years = 4
Average profit = Rs 5,10,000 ÷ 4 = Rs 1,27,500
Average profit for all five years:
Total profit = Rs 1,30,000 + Rs 1,20,000 + Rs 1,50,000 + Rs 1,10,000 + Rs 2,00,000 = Rs 7,10,000
Number of years = 5
Average profit = Rs 7,10,000 ÷ 5 = Rs 1,42,000
- Average profit for the first four years = Rs 1,27,500
- Average profit for all five years = Rs 1,42,000
Since the average profit of all five years is higher, the goodwill will be calculated based on that figure.
Goodwill = Average profit × Number of years' purchase
Average profit = Rs 1,42,000
Number of years' purchase = 3
Goodwill = Rs 1,42,000 × 3 = Rs 4,26,000
Therefore, the goodwill on the basis of 3 times the past five years' average profit is Rs 4,26,000.