Question

.Goodwill is to be valued at three years of purchase of five years average profits. The profit for the last five years were 2010 - Rs 4200, 2011 - Rs 4500, 2012 - Rs 4700, 2013 - Rs 4600 and 2014 - Rs 5000. Calculate Goodwill. *

Answer 1

Answer:

The Amount of Goodwill =  Rs. 13,800

Explanation:

Given :

• Goodwill is to be valued at 3 years of purchase

• 5 years average profit :

The profit for the last five years were :

Year --------------- Profit (Rs.)

2010 --------------- Rs 4,200

2011 ---------------- Rs 4,500

2012 ---------------- Rs 4,700

2013 ----------------- Rs 4,600

2014 ----------------- Rs 5,000

To find :

• Calculate the Value of Goodwill

Solution :

Goodwill = Average Profit × Number of year's Purchases

★ Average profit =

$\sf{\longrightarrow{\dfrac{Total \: Profit \: for \: past \: given \: years}{Number \: of \: years}}}$

$\sf{\longrightarrow{\dfrac{4,200 \: + \: 4,500\: + \:4,700\: + \:4,600\: + \:5,000}{5}}}$

$\sf{\longrightarrow{\dfrac{23,000}{5} = 4,600}}$

Average profit = Rs. 4,600

★ Goodwill = Average Profit × Number of year's Purchases

Number of years Purchases = 3 years

Goodwill = 4,600 × 3

$\longrightarrow \: 13,800$

Goodwill = Rs. 13,800

Therefore, The Amount of Goodwill =  Rs. 13,800.

Answer 2

Question:-

Compute the value of goodwill on the basis of 3 year's purchases of the average profit of the last five years. The profits for the last five years were as follows:

• 2010  - Rs 4200
• 2011   - Rs 4500
• 2012  - Rs 4700
• 2013  - Rs 4600
• 2014  - Rs 5000

Calculate the value of goodwill on the basis of 3 year's purchase of 5 year's average profits.

First, we have to find the average profit :

Given :

• 2010  - Rs 4200
• 2011   - Rs 4500
• 2012  - Rs 4700
• 2013  - Rs 4600
• 2014  - Rs 5000

According to the question by using the formula we get,

$\boxed{\bf{\implies Average\:profit = \dfrac{Total\:profits}{No:\:of\:years}}}$

$\bf{\implies Average\:profit = \dfrac{4,200+4,500+4,700+4,600+5,000}{5}}$

$\bf{\implies Average\:profit = \dfrac{23,000}{5}}$

$\bf{\implies Average\:profit = 4,600}$

$\boxed{\bf{\implies Average\:profit = 4,600}}$

Hence, the average profit is Rs 4,600 .

Now, we have to find goodwill :

Given:-

Average Profit = Rs 4,600

Number of Year's Purchase = 3 years

According to the question by using the formula we get,

$\boxed{\bf{Goodwill = Average\:profit\:\times\:no:\:of\:year\:purchases}}$

$\bf{Goodwill = 4,600\:\times\:3}$

$\bf{Goodwill = 13,800}$

$\boxed{\bf{Goodwill = 13,800}}$

$\boxed{\bf{\therefore The\:goodwill\:is\:Goodwill = 13,800}}$

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:

$\boxed{\bf{\implies Average\:profit = \dfrac{Total\:profits}{No:\:of\:years}}}$