The profits of the firm for the five years are as follows: YearProfit (Rs.)2012-1320,0002013-1424,0002014-1530

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The profits of the firm for the five years are as follows: YearProfit (Rs.)2012-1320,0002013-1424,0002014-1530,0002015-1625,0002016-1718,000Calculate the value of goodwill on the basis of three years' purchase of weighted average profits based on weights of the last five years as 1, 2, 3, 4 and 5 re

Accepted Answer

Let's compute the weighted average profit step by step: YearProfit (P)Weight (W)Product (P×W)2012-1320,000120,0002013-1424,000248,0002014-1530,000390,0002015-1625,00041,000,0002016-1718,000590,000Total15348,000Now, calculate the Weighted Average Profit:

Weighted Average Profit = \frac{\sum ( P \times W )}{\sum W} = \frac{3 , 48 , 000}{15} = Rs. 23, 200

Now, calculate the Goodwill value:

Goodwill = Weighted Average Profit \times Number of Years’ Purchase

Goodwill = 23, 200 \times 3 = Rs. 69, 600

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