Question

Purav and purvi are partners in a firm sharing profits and losses in the ratio 2:1. They decided to take Parv into partnership for 1/4th share on 1st April, 2020. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is the highest. The agreed profits for goodwill purpose of the past five years ended 31st March, are:
2016-14000
2017-15500
2018-10000
2019-16000
2020-15000
Calculate the value of goodwill.

Answer 1

Answer:

Total profit for last 4 years =15500+10000+16000+15000

=56500

• Average profit for 4 years =56500/4

=14125

Total profit for last 5 years = 14000+15500+10000+16000+15000 =70500

• Average profit for 5 years =70500/5

=14100

Average profit for 4 years is higher than average profit for 5 years.

So,

Goodwill = Average profit × no. of years' purchase

= 14125× 4

= 56500

hope it's clear for you