Question

compute the value of goodwill on the basis of 4 year's purchases of the average profit of the last five years. The profits for the last five years were as follows: ₹ 40,000, ₹ 50,000, ₹ 60,000, ₹ 50,000 and ₹ 60,000.​

Answer 1

Explanation:

This is to be done by Average Profits Method...

There is 5 years where every year has Profits...

Average Profits Method = Total Profits

No. of years

Therefore, APM = 40000+50000+60000+50000+60000

5

= 260000 = 52000

5

Goodwill = Average Profits × no of years

= 52000 × 4

= 208000

Hope you Understood!

Thank You and Happy Learning

Answer 2

Question:-

Compute the value of goodwill on the basis of 4 year's purchases of the average profit of the last five years. The profits for the last five years were as follows:

• 1st year = ₹ 40,000

• 2nd year = ₹ 50,000

• 3rd year = ₹ 60,000

• 4th year = ₹ 50,000

• 5th year = ₹ 60,000

Calculate the value of goodwill on the basis of 4 year's purchase of 5 year's average profits.

Solution:-

First, we have to find the average profit :

Given :

• 1st year = ₹ 40,000

• 2nd year = ₹ 50,000

• 3rd year = ₹ 60,000

• 4th year = ₹ 50,000

• 5th year = ₹ 60,000
• Number of years = 5 years

According to the question by using the formula we get,

$\implies\boxed{\bf{ Average\:profit =\dfrac{Total\:profit}{Number\:of\:years}}}$

$\implies{\bf{ Average\:profit =\dfrac{40,000+50,000+60,000+50,000+60,000}{5}}$

$\implies{\bf{ Average\:profit =\dfrac{2,60,000}{5}}$

$\implies{\bf{ Average\:profit =52,000}$

$\implies\boxed{\bf{ Average\:profit =52,000}}$

Hence, the average profit is Rs 52,000 .

Now, we have to find goodwill :

Given :

Average Profit = Rs 52,000

Number of Year's Purchase = 4 years

According to the question by using the formula we get,

$\implies\boxed{\bf{ Good\:will = Average\:profit\:\times\:Number\:of\:year's\:purchases}}$

$\implies\bf{ Good\:will = 52,000\:\times\:4}$

$\implies\bf{ Good\:will = 2,08,000}$

$\implies\boxed{\bf{ Good\:will = 2,08,000}}$

$\implies\boxed{\bf{\therefore The\\ :Good\:will\:is = 2,08,000}}$

Notes:-

Average profit

Average Profit method is one of the simplest methods of goodwill valuation that is used commonly. In this method, the value of goodwill is calculated by multiplying the average estimated profit or average future profit with the number of years of purchase.

Equation:

$\implies\boxed{\bf{ Average\:profit =\dfrac{Total\:profit}{Number\:of\:years}}}$