Question

The profits of last five years are 1,70,000; 1,80,000; 1,40,000; 2,00,000 and

1,60,000. Find the value of goodwill, if it is calculated on average profits of last five year

on the basis of three year’s purchase.

(a) 1,70,000 (b) 5,10,000 (c) 5,30,000 (d) 5,70,000​

Answer 1

Answer:

i think the answer a}1,70,000

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Answer 2

Concept:

Average Method-

• The average profit method is one of the most basic and widely used methods of valuing goodwill. The value of goodwill is calculated using this method by multiplying the average estimated profit or average future profit by the number of years since purchase.
• The simple average method calculates goodwill by multiplying the average profit by the agreed-upon number of years of purchase.

• Goodwill = Average Profit x Number of Purchase Years

Given:

Profits of last 5 years-

• 1,70,000
• 1,80,000
• 1,40,000
• 2,00,000
• 1,60,000

Years of purchase = 3

Find:

Goodwill of the firm on average profits of last 5 years.

Solution:

Average profits = (170000+180000+140000+200000+160000) / 5

Average Profits = 170000

Goodwill = 170000 x 3

Goodwill = 510000

Hence, the goodwill of the firm is 510000

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