6 :- Abhay, Babu, and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profits. For this purpose, the value of goodwill is to be calculated on the basis of four years’ purchase of the average profit of the last five years. These profits for the year ended 31st March were:
On 1st April 2024, a car for Rs 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25% p.a. Interest of Rs 10,000 on Non-Trade Investments is credited to Income for the year ended 31st March, 2024 and 2025.
Calculate the value of goodwill after adjusting the above.
Solution :-
Calculation of Average profit of last five years
Average profit = 1,50,000 + 3,50,000 + 5,00,000 + 700000 – 525000/5
= 11,75,000/5
= Rs 2,35,000
Calculation of goodwill of the firm
Goodwill = Average profit x No. of years purchased
= 2,35,000 x 4
= Rs 9,40,000