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Question 04 Chapter 3 of +2-Part-1
4. (Average Profit Method) Rani purchased Vani’s business on 31st March 2015. The profit disclosed by Vani business for the last three years were as follows:
Year
2013: Rs.40,000 (including an abnormal gain Rs.5,000)
2014: Rs.50,000(after charging an abnormal loss of Rs.10,000)
2015: Rs.45,000(excluding Rs.5,000 as insurance premium of firms property now to be insured)
Calculate the value of firm’s Goodwill on the basis of 2 years purchase of the average profit for the last three years.
Calculation of Adjusted Profit
| Year |
Profit | Adjustments | Adjusted Profit |
|---|---|---|---|
| 2013 | 40,000 | -5,000 | 35,000 |
| 2014 | 50,000 | + 10,000 | 60,000 |
| 2015 | 45,000 | - 5,000 | 40,000 |
| Total | 1,35,000 | ||
| Average Adjusted Profit | = | Total Profit for past given years |
| Number of years | ||
| = | 35,000 + 60,000 + 40,000 | |
| 3 | ||
| = | 1,35,000 | |
| 3 | ||
| = | 45,000 |
| Number of years’ purchase | = | 2 |
| Goodwill | = | Average Profit X Number of years’ purchase |
| Goodwill | = | 45,000 X 2 |
| Goodwill | = | 90,000 |
Working Note : -
*1 Calculation of Profits of last three years
| Adjusted Profit for the year 2013 | = | Total Profit − Abnormal Gain |
| = | 40,000 - 5,000 | |
| = | 35,000 |
| Adjusted Profit for the year 2014 | = | Total Profit +Abnormal Loss |
| = | 50,000 + 10,000 | |
| = | 60,000 |
| Adjusted Profit for the year 2015 | = | Total Profit − Indirect Expenses |
| = | 45,000 - 5,000 | |
| = | 40,000 |
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Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
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