Question

PRACTICAL PROBLEMS
Average Profit Method
1. Goodwill is to be valued at three years' purchase of four years' average profit. Profits of the form
four years ending on 31st March, were:
2018—12,000; 2019-18,000; 2020— 16,000; 2021-14,000.
Calculate the value of Goodwill.​

Answer 1

Answer:

The Value of Goodwill =  Rs. 45,000

Explanation:

Given :

• The Goodwill of firms should be valued on the basis of 3 year purchase

• 4 years average profit

$\begin{tabular}{|c|c|}\cline{1-2} Year & Profit \\\cline{1-2}\ 2018 & 12,000 \\\cline{1-2}\ 2019 & 18,000 \\\cline{1-2}\ 2020 & 16,000 \\\cline{1-2}\ 2021 & 14,000 \\\cline{1-2}\end{tabular}$

To find :

• Calculate the Value of Goodwill

Solution :

Goodwill = Average Profit × Number of year's Purchases

★ Average profit =

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

$\sf{\longrightarrow{\dfrac{12,000 \: + \: 18,000\: + \: 16,000 \: + 14,000}{4}}}$

$\sf{\longrightarrow{\dfrac{60,000}{4} = 15,000}}$

Average profit = 15,000

Goodwill = Average Profit × Number of year's Purchases

Number of years Purchases = 3 years

Goodwill = 15,000 × 3

$\longrightarrow \: 45,000$

Goodwill = 45,000

Therefore, The Value of Goodwill =  Rs. 45,000

Answer 2

Explanation:

No. of Purchases years = 3 years

Four years' average profit :

Year _______ profit (₹)

2018________12,000

2019 _______ 18,000

2020 ______ 16,000

2021 _______ 14,000

Goodwill = ??

Solution :

Average Profit =Total profit / Number of years

= 12,000 + 18,000 + 16,000 + 14,000 / 4

= 60,000 / 4

= 15,000

Average Profit = ₹ 15,000

Goodwill = Average Profit × No. of Purchases years

Goodwill = ₹ 15,000 × 3

= 45,000

Hence the amount of Goodwill ₹ 45,000.