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Divya purchased Jyoti's business with effect from 1st April, 2019. Profits shown by Jyoti's business for the last three financial years were:

2016-17: ₹1,00,000 (including an abnormal gain of ₹ 12,500).

2017-18: ₹1,25,000 (after charging an abnormal loss of ₹ 25,000)

2018-19: ₹1,12,500 (excluding ₹ 12,500 as insurance premium on firm's property - now to be insured).

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

 

Asked by doshid10 15th March 2019, 12:29 AM
Answered by Expert
Answer:
The information given in the question related to the past years' profits are to be adjusted for the non-operating or abnormal items before calculating the value of goodwill:
 
Adjusted Profits are as follows:
2016-17 = 100000 - 12500 (abnormal gain included is now removed) = 87500
2017-18 = 125000 + 25000 (abnormal loss charged now added) = 150000
2018-19 = 112500 - 12500 (insurance premium being an expense will now be reduced from the profits) = 100000
 
Average of Profits = (87500 + 150000 + 100000) / 3 = 112500
 
Goodwill = Average Profits x No. of years' purchase 
             = 112500 x 2
             = 225000
Answered by Expert 15th March 2019, 10:14 AM
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