Question

The profits of last five years are
80,000; 90,000; 70,000; 90,000 and
1,00,000. Find the value of goodwill, if it
is calculated on average profits of last
five year on the basis of three year's
purchase.​

Answer 1

Given:

• The profits for the last five years are Rs 80,000, Rs 90,000, Rs 70,000, Rs 90,000 and Rs 1,00,000.
• The value of goodwill is to be valued at 3 years' purchase of the average profit for the last 5 years.

To find: The value of goodwill.

Answer:

Average profit = Total profit ÷ Number of years

• Total profit = Rs 80,000 + Rs 90,000 + Rs 70,000 + Rs 90,000 + Rs 1,00,000 = Rs 4,30,000
• Number of years = 5

Average profit = Rs 4,30,000 ÷ 5

Average profit = Rs 86,000

Goodwill = Average profit × Number of years' purchase

Goodwill = Rs 86,000 × 3

Goodwill = Rs 2,58,000

Therefore, the value of goodwill is Rs 2,58,000.

Answer 2

Question:-

Compute the value of goodwill on the basis of 3 year's purchases of the average profit of the last five years. The profits for the last five years were as follows:

• 1st year = ₹ 80,000

• 2nd year = ₹ 90,000

• 3rd year = ₹ 70,000

• 4th year = ₹ 90,000

• 5th year = ₹ 1,00,000

Calculate the value of goodwill on the basis of 3 year's purchase of 5 year's average profits.

Solution:-

First, we have to find the average profit :

Given :

• 1st year = ₹ 80,000

• 2nd year = ₹ 90,000

• 3rd year = ₹ 70,000

• 4th year = ₹ 90,000

• 5th year = ₹ 1,00,000
• Number of years = 5 years

According to the question by using the formula we get,

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

$\implies{\bf{ Average\:profit =\dfrac{80,000+90,000+70,000+90,000+1,00,000}{5}}$

$\implies{\bf{ Average\:profit =\dfrac{4,30,000}{5}}$

$\implies{\bf{ Average\:profit =86,000}$

$\implies\boxed{\bf{ Average\:profit =86,000}}$

Hence, the average profit is Rs 86,000 .

Now, we have to find goodwill :

Given :

Average Profit = Rs 86,000

Number of Year's Purchase = 3 years

According to the question by using the formula we get,

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

$\implies\bf{ Good\:will = 86,000\:\times\:3}$

$\implies\bf{ Good\:will = 2,58,000}$

$\implies\boxed{\bf{ Good\:will = 2,58,000}}$

$\implies\boxed{\bf{\therefore The\\ :Good\:will\:is = 2,58,000}}$

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:

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