Read the following information and answer the question.
A and B are partners sharing profits equally. They admit C into partnership for equal share with a guaranteed profit of ₹20,000 per year. The books of the firm revealed following information-
Profits of the last 4 years is:
2016- ₹70,000
2017- ₹1,00,000
2018- ₹55,000 (loss)
2019- ₹1,45,000
What is goodwill of the firm if it is calculated at 2 years purchase of average profit of last 4 years?
Answer & explanation
Correct answer: option 2
The correct answer is option 2- ₹1,30,000.
TOTAL PROFIT = 70,000 + 1,00,000 - 55,000 + 1,45,000
= ₹2,60,000
AVERAGE PROFIT = 2,60,000/4
= ₹65,000
GOODWILL = Average profits x No of years purchase
= 65,000 x 2
= ₹1,30,000