# Chapter 3 - Goodwill: Nature And Valuation

#### Goodwill= Average profit × no. of purchases years’

Average profit = total profit of past given years/number of years

Average profit =12,000+18,000+16,000+14,000/4=15,000

Number of years’ purchase = 3

Goodwill= Average profit × no. of purchases years’

Goodwill= 15,000 × 3=45,000

#### Goodwill=Average Profit×Number of Years' Purchase

Average Profits = Total Profit÷Number of Years

Average Profits = 4,00,000+3,98,000+4,50,000+4,45,000+5,00,000÷5

Average Profits = 21,93,000÷5= ` 4,38,600

Goodwill =4,38,600×4= ` 17,54,400

#### Calculate value of goodwill on the basis of three years' purchase of average profit of the preceding five years which were as follows:

 Year 2022 2021 2020 2019 2018 Profits ( `) 8,00,000 15,00,000 18,00,000 4,00,000 (Loss) 13,00,000

Goodwill= Average profit × no. of purchases years’

Average profit = total profit of past given years/number of years

Average profit =8,00,000+15,00,000+18,00,000-4,00,000 (Loss)+ 13,00,000/5=50,00,000

Average profit =50,00,000/5÷10,00,000

Number of years’ purchase = 3

Goodwill= Average profit × no. of purchases years’

Goodwill= 10,00,000 × 3=30,00,000

#### Question 4:

Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2022 for 1/5th share in the future profits. For this purpose, goodwill is to be valued at 100% of the average annual profits of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were:

 Year Ended Profit ( `) 31st March, 2022 2,88,000; 31st March, 2021 1,81,800; 31st March, 2020 1,87,200; 31st March, 2019 2,53,200.

Calculate the value of goodwill.

Average Profits of Previous three years= 2,88,000+1,81,8000+1,87,200÷3= ` 2,19,000
Average Profits of Previous four years= 2,88,000+1,81,800+1,87,200+2,53,200÷4=
` 2,27,550
Since, the average profits of previous four years is greater than the average profits of previous three years.
Hence, Goodwill = 100% of Average Profits of Previous four years =  ` 2,27,550
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#### Calculate the value of firm's goodwill on the basis of one and half years' purchase of the average profit of the last three years. The profit for first year was  ` 1,00,000, profit for the second year was twice the profit of the first year and for the third year profit was one and half times of the profit of the second year.

Goodwill=Average Profit×No. of years' purchase

=2,00,000×1.5= ` 3,00,000

Working Notes:

WN: 1 Calculation of Profits of last three years

 Year Profit 1st Year 1,00,000 2nd Year 2,00,000 (1,00,000×2) 3rd Year 3,00,000 (2,00,000×1.5) Total Profit 6,00,000

WN: 2 Calculation of Average Profit

Average Profit=Total Profits for past given years/Number of Years

Average Profit =6,00,000/3= ` 2,00,000