Question

the profit for the five years of a firm are as follows -years 2010 Rs.4,00,000;year 2011 Rs.3,98,000; year 2012 Rs.4,50,000;year 2013 Rs.4,45,000 and year 2014 Rs.5,00,000. calculate goodwill of the firm on the firm on the basis of 4 years purchase of 5 years average profits.​

Answer 1

Answer:

Goodwill = 2104000

Explanation:

Calculation of goodwill of the firnm on the basis of 4 years purchase of 5 years average profit

1. Average profit = Total profit of last 5 years/ No. of years

Average profit =

Rs. (4,00,000 + 3,98,000 + 4,50,000 + 5,00,000 + 4,45,000)/5

Average profit = Rs. 2193000/5

Average profit = Rs. 1837000

2. Goodwill = Average profit * No. of year's purchase

Goodwill = Rs. 1837000 * 4

Goodwill = Rs. 2104000

Answer 2

Question:-

Compute the value of goodwill on the basis of 4 year's purchases of the average profit of the last five years. The profits for the last five years were as follows:

• 1st year = ₹ 40,000

• 2nd year = ₹ 50,000

• 3rd year = ₹ 60,000

• 4th year = ₹ 50,000

• 5th year = ₹ 60,000

Calculate the value of goodwill on the basis of 4 year's purchase of 5 year's average profits.

Solution:-

First, we have to find the average profit :

Given :

• 2010 = ₹ 4,00,000

• 2011 = ₹ 3,98,000

• 2012 = ₹ 4,50,000

• 2013 = ₹ 4,45,000

• 2014 = ₹ 5,00,000
• Number of years = 5 years

According to the question by using the formula we get,

$\implies\boxed{\bf{ Average\:profit =\dfrac{Total\:profit}{Number\:of\:years}}}$

$\bf{ \implies Average\:profit =\dfrac{4,00,000+3,98,000+4,50,000+4,45,000+5,00,000}{5}}$

$\implies{\bf{ Average\:profit =\dfrac{21,93,000}{5}}}$

$\implies{\bf{ Average\:profit =4,38,600}}$

$\implies\boxed{\bf{ Average\:profit =4,38,600}}$

Hence, the average profit is Rs 4,38,600 .

Now, we have to find goodwill :

Given :

Average Profit = Rs 4,38,600

Number of Year's Purchase = 4 years

According to the question by using the formula we get,

$\implies\boxed{\bf{ Good\:will = Average\:profit\:\times\:Number\:of\:year's\:purchases}}$

$\implies\bf{ Good\:will = 4,38,600\:\times\:4}$

$\implies\bf{ Good\:will = 17,54,400}$

$\implies\boxed{\bf{ Good\:will = 17,54,400}}$

$\implies\boxed{\bf{\therefore The\\ :Good\:will\:is = 17,54,400}}$

Notes:-

Average profit

Average Profit method is one of the simplest methods of goodwill valuation that is used commonly. In this method, the value of goodwill is calculated by multiplying the average estimated profit or average future profit with the number of years of purchase.

Equation:

$\implies\boxed{\bf{ Average\:profit =\dfrac{Total\:profit}{Number\:of\:years}}}$