Accountancy Part AAdmission of a Partner

The past average profits of a business works out at Rs. 20,000 and it…

The past average profits of a business works out at Rs. 20,000 and it is expected that such profits are likely to continue for another three years, the value of goodwill based on average profit method will be.........

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Rs. 60,000

Under the average profits method, goodwill is the average profit multiplied by the number of years for which such profits are expected to continue (the years’ purchase).

Goodwill = Average profits × Number of years’ purchase
= Rs. 20,000 × 3 = Rs. 60,000

NCERT (2026-27 edition):
Average Profits Method – “… The goodwill, therefore, should be calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue. For example, if the past average profits of a business works out at Rs. 20,000 and it is expected that such profits are likely to continue for another three years, the value of goodwill will be Rs. 60,000 (Rs. 20,000 × 3), …”