Question

Vipin agreed to purchase Abhishek’ business. The profits disclosed by Abhishek’ business for last four years were as follows:

2010: Rs. 50,000(including an abnormal gain of Rs. 10,000)

2011: Rs.55,000 (including an income from investments outside the business worth Rs. 5,000)

2012: Rs. 45,000 (after charging an abnormal loss of Rs. 5000)

2013: Rs. 66,000 (excluding Rs. 6,000 as insurance premium on firm’* property – now to be insured)

Calculate the value of firm’* goodwill on the basis of three years’ purchase of Average Profits of last four years.

Answer 1

Calculation of Average profits

| Profit for 2010 (Rs.50,000 – Rs.10,000) | 40,000 |
| Profit for 2011 (Rs.55,000 – Rs.5,000) | 50,000 |
| Profit for 2012 (Rs.45,000 + Rs.5,000) | 50,000 |
| Profit for 2013 (Rs.66,000 – Rs.6,000) | 60,000 |
| Total profits for four years | 2,00,000 |

Average profit =(2,00,000/4) = 50,000

Goodwill at 3 Years’ purchase of Average profits = 50,000 x 3 = Rs.1,50,000