A, B AND CARE PARTNERS IN A FIRM. THEY DECIDED TO TAKE D AS A NEW PARTNER FROM 1st APRIL 2019 FOR 1/5th SHARE. FOR THIS PURPOSE, GOODWILL IS TO BE VALUED AT 3 YEARS PURCHASE OF THE AVERAGE PROFIT OF THE PREVIOUS THREE OR FOUR YEARS, WHICHEVER IS HIGHER. PROFITS OF THE PAST FOUR YEARS ARE: YEAR ENDED 31st MARCH 2019 31st MARCH 2018 31st MARCH 2017 31st MARCH 2016 Calculate the value of Goodwill. Career Launcher Education Foundation (AP) PROFIT (Rs.) 2,88,000 1,81,800 49,800 (Loss) 1,60,000
Answers
Given data:
- A, B and C are partners in a firm.
- D is admitted into the firm for 1/5th of the shares.
- Profits for the last 4 years were Rs 2,88,000, Rs 1,81,000, Rs 49,800 and a loss of Rs 1,60,000.
- The goodwill is to be valued at 3 years' purchase of the average profit of the last 3 or 4 years, whichever is higher.
To find: The goodwill.
Answer:
Calculation of the average profit of the last 3 years:
Profits for the last 3 years:
- Rs 2,88,000
- Rs 1,81,800
- Rs 49,800
Average profit = Total profit ÷ Number of years
Average profit = (Rs 2,88,000 + Rs 1,81,800 + Rs 49,800) ÷ 3
Average profit = Rs 1,73,200
Calculation of the average profit of the last 4 years:
Profits for the last 4 years:
- Rs 2,88,000
- Rs 1,81,800
- Rs 49,800
- (Rs 1,60,000)
Average profit = Total profit ÷ Number of years
Average profit = (Rs 2,88,000 + Rs 1,81,800 + Rs 49,800 - Rs 1,60,000) ÷ 4
Average profit = Rs 89,900
Since the average profit for the last 3 years [Rs 1,73,200] is greater than the average profit for the last 4 years [Rs 89,900], the goodwill will be valued at 3 years' purchase of the average profit of the last 3 years, i.e., Rs 1,73,200.
Goodwill = Average profit × Number of years' purchase
Goodwill = Rs 1,73,200 × 3
Goodwill = Rs 5,19,600
Therefore, the goodwill is Rs 5,19,600.