Question

Calculate the value of goodwill at 3 years purchase of average profit of the last three years profit;
The profit of the first year was Rs. 8000, second year twice the profit of the first year and third
year one and half of the profit of the second year.
(Ans:- Value of goodwill Rs. 48000)​

Answer 1

Given:

• The profit of the first year was Rs 8,000.
• The profit of the second year was twice the profit of the first year.
• The profit of the third year was one and a half times the profit of the second year.
• The value of goodwill is to be based on 3 years' purchase of the average profit of the last 3 years.

To find: The value of goodwill.

Answer:

• Profit for the first year = Rs 8,000
• Profit for the second year = Rs 8,000 × 2 = Rs 16,000
• Profit for the third year = Rs 16,000 × 1.5 = Rs 24,000

Average profit = Total profit ÷ Number of years

• Total profit = Rs 8,000 + Rs 16,000 + Rs 24,000 = Rs 48,000
• Number of years = 3

Average profit = Rs 48,000 ÷ 3

Average profit = Rs 16,000

Goodwill = Average profit × Number of years' purchase

Goodwill = Rs 16,000 × 3

Goodwill = Rs 48,000

Therefore, the value of goodwill is Rs 48,000.