The profits of a firm of last four years were respectively Rs. 40000, Rs. 60000, Rs. 55000, and Rs. 45000. In this case, the value of goodwill on the basis of three years’ purchase... The profits of a firm of last four years were respectively Rs. 40000, Rs. 60000, Rs. 55000, and Rs. 45000. In this case, the value of goodwill on the basis of three years’ purchase of average profits of last four years would be?
Understand the Problem
The question is asking to calculate the value of goodwill based on the average profits of the last four years, using the profits provided for each year and applying a three-year purchase basis.
Answer
The value of goodwill is Rs. 525000.
Answer for screen readers
The value of goodwill is Rs. 525000.
Steps to Solve
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Calculate Total Profits Add the profits from the last four years.
$$ \text{Total Profits} = 40000 + 60000 + 55000 + 45000 $$ -
Calculate Average Profits Divide the total profits by the number of years to find the average.
$$ \text{Average Profits} = \frac{\text{Total Profits}}{4} $$ -
Calculate Goodwill Value Multiply the average profits by three to find the goodwill value based on three years’ purchase.
$$ \text{Goodwill Value} = \text{Average Profits} \times 3 $$
The value of goodwill is Rs. 525000.
More Information
Goodwill represents the value of a business beyond its tangible assets and liabilities, reflecting reputation, customer relations, and other non-physical assets.
Tips
- Forgetting to divide by the correct number of years when calculating average profits. Make sure to divide by 4 since there are four years of profits.
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