Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decided to take Parv into partnership for 1/4th share on 1st April, 2021. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years ended 31st March, are: Calculate the value of goodwill.
Attachments:
Answers
Answered by
4
Given:
- Purav and Purvi are partners in a firm, sharing profits and losses in the ratio 2:1.
- They decide to take Parv into the partnership for 1/4th share on 1st April 2021.
- The goodwill is to be valued at 4 times the average profit for the previous 4 or 5 years, whichever is higher.
To find: The value of goodwill.
Answer:
Profits for the last 5 years:
- 2021 - Rs 15,000
- 2020 - Rs 16,000
- 2019 - Rs 10,000
- 2018 - Rs 15,500
- 2017 - Rs 14,000
Average profits for the past 4 years:
Average profit = Total profit ÷ Number of years
- Total profit = Rs 15,000 + Rs 16,000 + Rs 10,000 + Rs 15,500 = Rs 56,500
- Number of years = 4
Average profit = Rs 56,500 ÷ 4
Average profit = Rs 14,125
Average profit for the past 5 years:
Average profit = Total profit ÷ Number of years
- Total profit = Rs 15,000 + Rs 16,000 + Rs 10,000 + Rs 15,500 + Rs 14,000 = Rs 70,500
- Number of years = 5
Average profit = Rs 70,500 ÷ 5
Average profit = Rs 14,100
Since the average profit for the past 4 years is higher, it will be considered to calculate the value of goodwill.
Goodwill = Average profit × Number of years' purchase
Goodwill = Rs 14,125 × 4
Goodwill = Rs 56,500
Therefore, the value of goodwill is Rs 56,500.
Similar questions