Calculate the value of firm's goodwill on the basis of 2 years purchase of the average profit for the last three years.

Steps to Solve

1. Identify the profits for each year

   We have the following profits for the last three years, adjusting for the abnormal gains and losses:

   • 2017: ₹40,000 (abnormal gain of ₹5,000 included)
     Adjusted profit: ₹40,000 - ₹5,000 = ₹35,000

   • 2018: ₹50,000 (after an abnormal loss of ₹10,000 charged)
     Adjusted profit: ₹50,000 + ₹10,000 = ₹60,000

   • 2019: ₹45,000 (excluding ₹5,000 insurance premium)
     Adjusted profit: ₹45,000 + ₹5,000 = ₹50,000

2. Calculate total adjusted profits

   Now, we sum up the adjusted profits:

   $$ \text{Total Adjusted Profits} = ₹35,000 + ₹60,000 + ₹50,000 $$

   Calculating this gives us:

   $$ \text{Total Adjusted Profits} = ₹145,000 $$

3. Find the average profit

   The average profit over the last three years is calculated as:

   $$ \text{Average Profit} = \frac{\text{Total Adjusted Profits}}{3} $$

   So,

   $$ \text{Average Profit} = \frac{₹145,000}{3} \approx ₹48,333.33 $$

4. Calculate goodwill

   Lastly, we calculate the goodwill based on 2 years’ purchase of the average profit:

   $$ \text{Goodwill} = \text{Average Profit} \times 2 $$

   Thus,

   $$ \text{Goodwill} = ₹48,333.33 \times 2 = ₹96,666.66 $$