Question

If the profit earned during the last five years are Rs. 120,000, Rs. 140,000, Rs. 130,000 Rs. 70,000, and Rs. 120,000. Calculate the value of goodwill, under the average profit method, and 3-years purchase of the average profits of the last five years

Answer 1

Average profit = 120000+140000+130000+70000+120000/5

= 96000

Hence goodwill =3*96000
=288000

Answer 2

Question:-

If the profit earned during the last five years are

• Rs. 120,000

• Rs. 140,000

• Rs. 130,000

• Rs. 70,000

• Rs. 120,000

Calculate the value of goodwill, under the average profit method, and 3-years purchase of the average profits of the last five years

To find:-

Goodwill (Average profit method)

Solution:-

Profit for the last 5 years are:-

First, we have to find the average profit:-

Given :

• Number of Years = 5 years

• First year = 1,20,000

• Second year = 1,40,000

• Third year = 1,30,000

• Fourth year = 70,000

• Fifth year = 1,20,000

According to the question by using the formula we get,

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

$\sf{:\implies Average\:profit =\dfrac{1,20,000+1,40,000+1,30,000+70,000+1,20,000}{5}}$

$\sf{:\implies Average\:profit = \dfrac{5,80,000}{5}}$

$\bf{:\implies Average\:profit = 1,16,000}$

Hence, the average profit is Rs 1,16,000

Now, we have to find goodwill :

Given :

• Average Profit = Rs 1,16,000

• Number of Year's Purchase = 3 years

According to the question by using the formula we get,

$\boxed{\sf{:\implies Goodwill = Average\:profit\:x\:No:of\:year\: purchases }}$

$\sf{:\implies Goodwill = 1,16,000\:x\:3 }$

$\sf{:\implies Goodwill = 3,48,000 }$

$\boxed{\sf{\therefore Goodwill = 3,48,000 }}$