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CA Foundation · Accounting · Partnership and LLP Accounts

The profits of a firm for the last four years were ₹1,20,000, ₹1,40,000, ₹1,60,000 and ₹1,80,000. Goodwill is to be valued at 2 years' purchase of the simple average profit of these four years. What is the value of goodwill?

Goodwill is ₹3,00,000. The average profit is the total of ₹6,00,000 divided by four years, which gives ₹1,50,000. Multiplying this average by the two years' purchase gives goodwill of ₹3,00,000 under the average profit method.

  1. A₹3,00,000Correct
  2. B₹2,80,000
  3. C₹3,20,000
  4. D₹6,00,000

Explanation

Total profit = 1,20,000+1,40,000+1,60,000+1,80,000 = 6,00,000. Average = 6,00,000/4 = 1,50,000. Goodwill = 1,50,000 x 2 = 3,00,000. The option of ₹6,00,000 wrongly multiplies the total profit by 2 and then does not divide, or equivalently confuses the total with the average.

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