Question

The total capital of the firm of Sourabh, Mohit and Nikhil was Rs. 1,00,000. The net profits for the last three years were: 2019–20 Rs. 40,000; 2020–21 Rs. 46,000; 2021–22 Rs. 52,000. There was an abnormal loss of Rs. 3,000 in 2020–21. Goodwill is to be valued at 2 years’ purchase of the \emph{average profit} of the last three years. Calculate the goodwill of the firm.

Hint:

Average Profit Method: first make profits \emph{comparable} (remove abnormal items), then multiply the average by the stated years’ purchase.

Answer 1

Step 1: Adjust profits for abnormalities.
Abnormal losses depress profit and should be \emph{added back} to find normal maintainable profits. \[ \begin{aligned} \text{2019–20 (normal)} &= 40{,}000
\text{2020–21 (normal)} &= 46{,}000 + 3{,}000 = 49{,}000
\text{2021–22 (normal)} &= 52{,}000 \end{aligned} \]
Step 2: Compute Average Profit (Simple Average).
\[ \text{Average Profit}=\frac{40{,}000+49{,}000+52{,}000}{3} =\frac{1{,}41{,}000}{3}=47{,}000. \]
Step 3: Apply Years’ Purchase.
Goodwill (Average Profit Method) \(=\) Average Profit \(\times\) Years’ Purchase \[ \text{Goodwill}=47{,}000 \times 2 = 94{,}000. \] Note. The given “total capital Rs. 1,00,000” is \emph{not} required in the Average Profit Method (it would matter in Capitalisation/Super Profit methods).
Final Answer: \[ \boxed{\text{Goodwill of the firm} = \text{Rs. }94{,}000} \] % Quciktip