Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years? The profits for the last five years were as follows: 2015 Rs. 40,000; 2016 Rs. 50,000; 2017 Rs. 60,000; 2018 Rs. 50,000; 2019 Rs. 60,000.
Rs. 2,08,000
Explanation
The solution follows the simple average profit method demonstrated in Illustration 9 of the provided context. The total profits for the five years are aggregated to find the average profit, which is then multiplied by the number of years' purchase (4 years) to arrive at the goodwill value.
Solution Steps
Step 1: Calculate Total Profits for the last 5 years. Total Profit = Rs. 40,000 + Rs. 50,000 + Rs. 60,000 + Rs. 50,000 + Rs. 60,000 = Rs. 2,60,000.
Step 2: Calculate Average Profit. Average Profit = Total Profit / No. of years Average Profit = Rs. 2,60,000 / 5 = Rs. 52,000.
Step 3: Calculate Goodwill. Goodwill = Average Profit × No. of years' purchase Goodwill = Rs. 52, = Rs. 2,08,000.