Question

Q.3. A, B and C are partners in a firm sharing profits and losses in the ratio of
3:2:1. They decide to take D into partnership for 1/4th share on 1st April, 2017. For
this purpose, goodwill is to be valued at 3 times the average annual profits of the
previous four or five years whichever is higher. The agreed profits for goodwill
purpose of the past five years are as follows:
₹
Year ending on 31st March 2013
1,30,000
Year ending on 31st March 2014
1,20,000
Year ending on 31st March 2015
1,50,000
Year ending on 31st March 2016
1,10,000
Year ending on 31st March 2017
2,00,000
Calculate the value of Goodwill.
[Ans. Goodwill *4,35,000]​

Answer 1

ANSWER :

• ✎ As the Average Annual Profits of four years is higher than the Average Annual Profits of previous five years; therefore, Goodwill is to be valued at 3 times the average annual profits of the previous four years and the value of Goodwill is Rs. 4,35,000.

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SOLUTION :

❒ Given :-

• Goodwill is to be valued at 3 times the average annual profits of the previous four or five years whichever is higher.

• Profit for the year ending on 31st March 2013 Rs. 1,30,000

• Profit for the year ending on 31st March 2014 Rs. 1,20,000

• Profit for the year ending on 31st March 2015 Rs. 1,50,000

• Profit for the year ending on 31st March 2016 Rs. 1,10,000

• Profit for the year ending on 31st March 2017 Rs. 2,00,000

❒ To Calculate :-

• Value of Goodwill = ?

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❒ Note :-

• ➻ It is given that, Goodwill is to be valued at 3 times the average annual profits of the previous four or five years whichever is higher.

• ➻ Therefore, first we need to calculate the average annual profits of previous four years as well as previous five years to know which one is higher.

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❒ Calculation of Average Annual Profit of previous four years :-

Here,

• Profit for the year ending on 31st March 2014 Rs. 1,20,000

• Profit for the year ending on 31st March 2015 Rs. 1,50,000

• Profit for the year ending on 31st March 2016 Rs. 1,10,000

• Profit for the year ending on 31st March 2017 Rs. 2,00,000

∴ Sum of the profits of four years = Rs. 1,20,000 + Rs. 1,50,000 + Rs. 1,10,000 + Rs. 2,00,000

➨ Sum of the profits of four years = Rs. 5,80,000

Hence,

• ★ Average Annual Profits of four years = $\sf{\dfrac{Sum \: \: of \: \: the \: \: profits \: \: of \: \: four \: \: years}{No. \: \: of \: \: years }}$

➨ Average Annual Profits of four years = $\sf{\dfrac{Rs. 5,80,000}{4}}$

➨ Average Annual Profits of four years = Rs. 1,45,000

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❒ Calculation of Average Annual Profit of previous four years :-

Here,

• Profit for the year ending on 31st March 2013 Rs. 1,30,000

• Profit for the year ending on 31st March 2014 Rs. 1,20,000

• Profit for the year ending on 31st March 2015 Rs. 1,50,000

• Profit for the year ending on 31st March 2016 Rs. 1,10,000

• Profit for the year ending on 31st March 2017 Rs. 2,00,000

∴ Sum of the profits of five years = Rs. 1,30,000 + Rs. 1,20,000 + Rs. 1,50,000 + Rs. 1,10,000 + Rs. 2,00,000

➨ Sum of the profits of five years = Rs. 7,10,000

Hence,

• ★ Average Annual Profits of five years = $\sf{\dfrac{Sum \: \: of \: \: the \: \: profits \: \: of \: \: five \: \: years}{No. \: \: of \: \: years }}$

➨ Average Annual Profits of five years = $\sf{\dfrac{Rs. 7,10,000}{5}}$

➨ Average Annual Profits of four years = Rs. 1,42,000

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❒ Calculation of Value of Goodwill :-

Here,

• Average Annual Profits of previous four years = Rs. 1,45,000

• Average Annual Profits of previous five years = Rs. 1,42,000

As the Average Annual Profits of previous four years is higher than the Average Annual Profits of previous five years; therefore, Goodwill is to be valued at 3 times the average annual profits of the previous four years, i.e, Rs. 1,45,000.

• ✪ Value of Goodwill = Average Annual Profits × 3

➜ Value of Goodwill = Rs. 1,45,000 × 3

∴ Value of Goodwill = Rs. 4,35,000

• Hence, the required value of Goodwill is Rs. 4,35,000.

Answer 2

Answer:

goodwill = avg.annual profit of previous 4 years i.e.

= 145000 × 3 = 435000