Calculate goodwill on the basis of two years' purchase of average profit of last four years.

Profit/Loss of last four years is given below:

Additional information: Closing Stock of the year 2022 was overvalued by ₹20,000.

₹2,00,000

The correct answer is Option (1) → ₹2,00,000.

Profit of 2020 = 1,00,000

Profit of 2021 = 1,50,000

Profit of 2022 = 2,20,000 - Overvalued closing stock
                       = 2,20,000 - 20,000
                       = 2,00,000

Profit of 2023 = (70,000) + Undervaluation of opening stock (Last year closing stock becomes opening stock)
                       = (70,000) + 20,000
                        = (50,000)

Total of profits = 1,00,000  + 1,50,000 + 2,00,000 - 50,000
                        = 4,00,000

Total no of years = 4

Average profit = Total profit/ No of year
                       = 4,00,000/4
                       - 1,00,000

Goodwill = Average profits x No of purchase
              = 1,00,000 x 2
              = 2,00,000