Profits earned by the business during the last 5 years were:
2018- ₹12,000
2019- ₹13,000
2020- ₹14,000
2021 - ₹18,000
2022- (₹2,000)
Calculate the amount of goodwill to be valued at 2 years purchase of average profits of last 5 years.
Answer & explanation
Correct answer: option 2
The correct answer is option 2- ₹22,000.
2018- ₹12,000
2019- ₹13,000
2020- ₹14,000
2021 - ₹18,000
2022- (₹2,000)
Total profit of 5 year = 12,000 + 13,000 + 14,000 + 18,000 -2,000
= 55,000
*2022 Year is a loss so it is deducted from the profits.
AVERAGE PROFIT = Total profits/No of years
= 55,000/5
= 11,000
Goodwill = Average profit x No of years purchase
= 11,000 x 2
= ₹22,000