Question 9 of 64intermediate🔧 ApplyNumerical3 marks

A firm’s profits for the last three years are Rs. 5,00,000; Rs. 4,00,000 and Rs. 6,00,000. Calculate value of firm’s goodwill on the basis of four years’ purchase of the average profits for the last three years.

Correct Answer

Step 1: Calculate Total Profits Total Profits = Rs. 5,00,000 + Rs. 4,00,000 + Rs. 6,00,000 = Rs. 15,00,000

Step 2: Calculate Average Profit Average Profit = Total Profits / No. of years = Rs. 15,00,000 / 3 = Rs. 5,00,000

Step 3: Calculate Goodwill Goodwill = Average Profit × No. of years' purchase = Rs. 5,00,000×4000 \times 4 = Rs. 20,00,000

Therefore, the value of firm's goodwill is Rs. 20,00,000.

Exercise: Do It Yourself | Q: 1 | (Page 29)
For More Understanding

Explanation

This question follows the same methodology as Illustration 9 in the textbook. The formula for calculating goodwill based on average profits method is: Goodwill = Average Profits × No. of years purchased. First, we sum all profits for the given years, then divide by the number of years to get average profit, and finally multiply by the years' purchase to arrive at goodwill value.

Solution Steps

  1. Step 1: Calculate Total Profits = Rs. 5,00,000 + Rs. 4,00,000 + Rs. 6,00,000 = Rs. 15,00,000

  2. Step 2: Calculate Average Profit = Rs. 15,00,000 / 3 = Rs. 5,00,000

  3. Step 3: Calculate Goodwill = Rs. 5,00,000×4000 \times 4 = Rs. 20,00,000

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