Question 24 of 45
Q.The profits and losses of a firm for the last four years were as follows : 2015 : ₹ 15,000 ; 2016 : ₹ 17,000 ; 2017 : ₹ 6,000 (Loss) ; 2018 : ₹ 14,000. You are required to calculate the amount of goodwill on the basis of 5 years purchase of average profits of the last 4 years.
Tamil Nadu DgeTamil Nadu HSC (DGE) Commerce Board 2022Subjective· 3mImportance★★★★★
53% · 24/45 Questions
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Start your 14-day free trial to unlock the full solution →Average profit of the last 4 years = ₹10,000; at 5 years' purchase, goodwill = ₹10,000 × 5 = ₹50,000.
Under the average profit method, goodwill is valued as the average profit of the given years multiplied by the agreed number of years' purchase. A loss year is taken as a negative figure.
Step 1 — Total profit of the last 4 years:
| Year | Profit / (Loss) (₹) |
|---|---|
| 2015 | 15,000 |
| 2016 | 17,000 |
| 2017 | (6,000) |
| 2018 | 14,000 |
| Total | 40,000 |
Total profit = 15,000 + 17,000 − 6,000 + 14,000 = ₹40,000.
Step 2 — Average profit:
Average profit = Total profit ÷ Number of years = ₹40,000 ÷ 4 = ₹10,000.
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