Question

Goodwill is to be valued at three years purchase of five years average profits. The profit for the last five years were 2010 – Rs. 4,200; 2011 — Rs. 4,500; 2012 – Rs. 4,700; 2013 – Rs. 4,600; and 2014 – Rs.  5,000.

Answer 1

Calculation of average profit:

Average profit = (Total profit)/(Number of years) 

= 23,000/5

= Rs. 4,600

Calculation of goodwill = Average profit x No. of years purchase 

= Rs. 4,600 x 3 

= Rs. 13,800