Question

Simran purchased Anita's business on 1st April, 2020. It was agreed to value goodwill at three
years' purchase of average normal profit of the last four years. The profits of Anita's business
Illustration 4 (Average Profit Method when Past Adjustments are Made).
for the last four
years were:
Year Ended
31st March, 2017
90,000;
31st March, 2018
1,60,000;
31st March, 2019
1,80,000;
31st March, 2020
2,20,000.
Following further facts are noticed from the books of account that:
1. During the year ended 31st March, 2017, an asset was sold at a gain (profit) of 10,000,
2. During the year ended 31st March, 2018, a machine got destroyed in accident and * 30,000
was written off as loss in Profit and Loss Account.
3. During the year ended 31st March, 2019, firm's assets were not insured due to oversight
Insurance premium being 10,000. It is a regular expense, incurred every year.
Calculate the value of goodwill.​

Answer 1

Answer:

Explanation:

Year ended profit

2017  Profit  - Sold

      90000 - 10000

= 80000

2018 -  Profit - Machinery destroyed

        = 160000 + 30000

        = 190000

2019  Profit - insurance premium

        = 180000 -10000

        = 170000

2020  Profit

      = 220000

Total profit = 660000

Average profit = 660000/ 4

                         =  165000

Goodwill = No. of years purchase *  Average profit

              = 3 * 165000

               = 495000