Question

Sumit purchased Amit’s business on 1st April, 2018. Goodwill was decided to be valued at two years’ purchase of average normal profit of last
four years. The profits for the past four years were:
Books of Account revealed that:
(i) Abnormal loss of ₹ 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2015.
(ii) A fixed asset was sold in the year ended 31st March, 2016 and gain (profit) of ₹ 25,000 was credited to Profit and Loss Account.
(iii) In the year ended 31st March, 2017 assets of the firm were not insured due to oversight. Insurance premium not paid was ₹ 15,000.
Calculate the value of goodwill.

Answer 1

Explanation:

Working Notes:

Goodwill = $Average Profit \times Number of years Purchase Goodwill$

$=1,41,250 \times 2=\mathrm{Rs} .2,82,500$

Total of Normal Profit = $1,00,000+1,20,000+1,45,000+2,00,000$

$=\mathrm{Rs.} 5,65,000$

$Average Profit =\frac{Total Profits for Previous given years}{No of years}$

$=\frac{5,65,000}{4} =\mathbf{} 1,41,250$

Answer 2

Answer:

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