# Abhay, Babu and Charu are partners sharing profits and losses equally. They agree to admit Daman for equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years’ purchase of average profit of last five years. These profits for the year ended 31st March, were:

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Updated on: September 25th, 2023

 Year 2015 2016 2017 2018 2019 Profit/(Loss) (₹) 1,50,000 3,50,000 5,00,000 7,10,000 (5,90,000)

On 1st April 2018, a car costing ₹ 1,00,000 was purchased and debited to the Travelling Expenses Account, on which depreciation is to be charged @ 25%. The interest of ₹ 10,000 on Non-trade Investments is credited to income for the year ended 31st March 2018 and 2019.

Calculate the value of goodwill after adjusting the above.

Given, that a car costing ₹ 1,00,000 was purchased on 1st April 2018.

Depreciation of car is charged at 25%

The interest of ₹ 10,000 on Non-trade investments is credited to the income for the years 2018 and 2019.

We have to calculate the goodwill.

Depreciation of car = 25% of 1,00,000

= 25/100 x 1,00,000

= 25 x 1000

= 25,000

Normal Profits of the year 2018 = Total profits + Purchase of car wrongly debited – Depreciation on the car – Income from non-trade investments

= 7,10,000 + 1,00,000 – 25,000 – 10,000

= 8,10,000 – 35,000

= 7,75,000

Normal profits of the year 2019 = Total loss + Income from non-trade investments

= 5,90,000 + 10,000

= 6,00,000

Average profits = Normal profits from the year 2015 to 2019/5

= (1,50,000 + 3,50,000 + 5,00,000 + 7,75,000 + 6,00,000) / 5

= 23,75,000/5

= 4,75,000

Goodwill = average profit x number of years of purchase

= 4,75,000 x 4

= 19,00,000

Therefore, the required goodwill is ₹ 19,00,000

Summary:

## Abhay, Babu, and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years’ purchase of average profit for the last five years. These profits for the year ended 31st March were:

Abhay, Babu, and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years’ purchase of average profit for the last five years. The value of goodwill after adjusting the above is ₹ 19,00,000.

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