Question

A and B are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take C into partnership for 1/4th share on 1st April, 2018. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years whichever is higher. The agreed profits for goodwill purpose of the past five years are:

Answer 1

Average profits (4 years)> Average profits (5 years)

Accordingly, for goodwill valuation, Average profits = 14,125.