Tarang purchased Jyoti’s business with effect from 1st April,2025.

5 :-  Tarang purchased Jyoti’s business with effect from 1st April, 2025. Profits shown by Jyoti’s Business for the last three financial years ended 31st March were:
2023 : Rs 1,00,000 (including an abnormal gain of Rs 12,500).
2024 : Rs 1,25,000 (after charging an abnormal loss of Rs 25,000)
2025: Rs 1,12,500 (excluding Rs 12,500 as insurance premium on firm’s property – now to be insured).
Calculate the value of the firm’s goodwill on the basis of two years’ purchase of the average profit of the last three years.

Solution:- Calculation of normal profit after adjustment
2023 = 1,00,000 – 12,500 = Rs 87,500
2024 = 1,25,000 + 25,000 = Rs 1,50,000
2025 = 1,12,500 – 12,500 = Rs 1,00,000

Calculation of Average profit of last three years
Average profit of 3 years = 87,500 + 1,50,000 + 1,00,000/3
                                         = Rs 1,12,500

Goodwill = Average profit x No. of year purchased
               = 1,12,500 x 2

= Rs 2,25,000