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If profits for three years are ₹40,000, ₹50,000 and ₹60,000 and goodwill is valued at two years' purchase, what is goodwill?

Answer and explanation

Correct answer: ₹1,00,000

Under the average-profit method, first calculate average profit: (₹40,000+₹50,000+₹60,000)÷3 = ₹1,50,000÷3 = ₹50,000. Goodwill at two years' purchase equals average profit multiplied by the agreed years of purchase: ₹50,000×2 = ₹1,00,000. Therefore option A is correct. ₹50,000 is only the average profit, while the other amounts use an incorrect multiplier or calculation.

Related tags

GoodwillAverage ProfitYears PurchaseNumericalGoodwill AccountingGoodwill AccountingReconstitution Admission Of A PartnerAccountancy

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