Question

A,B and C are partners in a firm sharing profits and losses in the ratio 3:2:1 they decide to take d into partnership for 1/4th share on 1st April 2017. For this purpose goodwill is to be valued at 3 times the average annual profit of the previous four of five year whichever is higher. the agreed profits are:

31/3/2013 - 1,30,000
31/3/2014 - 1,20,000
31/3/2015 - 1,50,000
31/3/2016 - 1,10,000
31/3/2017 - 2,00,000

calculate the value of goodwill.​

Answer 1

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

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