Question

The profits of Mr. Ram & Co. for the last three years are Rs. 10,000, Rs. 12,000 and Rs. 14,000 respectively. The goodwill of a business is to be valued at 2 years' purchase of the average profits of the last three years. Hence, the value of goodwill will be

Answer

A. O Rs. 12,000

B.ORs. 24,000

C. Rs. 36,000
D. O Rs. 48,000​

Answer 1

Given:

• The profits of Mr Ram & Co. for the last 3 years are Rs 10,000, Rs 12,000 and Rs 14,000 respectively.
• The goodwill is to be valued at 2 years' purchase of the average profits of the last 3 years.

To find: The value of goodwill.

Answer:

Average profit = Total profit ÷ Number of years

• Total profit = Rs 10,000 + Rs 12,000 + Rs 14,000 = Rs 36,000
• Number of years = 3

Average profit = Rs 36,000 ÷ 3

Average profit = Rs 12,000

Goodwill = Average profit × Number of years' purchase

Goodwill = Rs 12,000 × 2

Goodwill = Rs 24,000

Therefore, the value of goodwill is (B) Rs 24,000.