Question

X sold his business to Y. Calculate the value of goodwill taking into consideration the following factors: I) Goodwill is valued at three year's purchase of the average profit of the last four years . Profit of the last four years were as: Year 2009 -- Rs 40,000, 2010-- Rs 58,000, year 2011 -- Rs 53,000, year 2012 -- Rs 60,000. II) Abnormal loss of Rs 2,000 due to the theft has reduced the profit of the year 2009. III) Profit for the year 2010 include abnormal profit of Rs 4,000. IV) A speculative and lottery profit of Rs 5,000 was received during the year 2011 which was included in the years profit. V) Profit of the year 2012 were reduced by Rs 10,000 on such a machinery which was destroyed by the fire during the year.

Answer 1

Answer:

Year. Profit. adjustment.After adjustment profit

2009. 40000. +2000. = 42000

2010. 58000. -4000 = 54000

2011. 53000. -5000 = 48000

2012. 60000. +10000 = 70000

Avg profit = 214000 ÷ 4 = 53500

Godwill = 53500 ×3 = 160500 Rs

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