(Average Profit Method when Adjustments are Made).
Aman purchased Bharatendu's business with effect from 1st April, 2019. It was agreed that the firm's goodwill will be valued at two years' purchase of average normal profit of the lst three years. Profits of Bharatendu's business for last three years ended 31st March, were:
2017 : Rs. 1,00,000 (including an abnormal gain of Rs. 10,000),
2018 : Rs. 1,10,000 (after charging an abnormal loss of Rs. 20,000),
2019 : Rs. 85,000 (including interest of Rs. 5,000 from non-trade investment).
Calculate value of the firm's goodwill.

Explanation

`{:(" Years",,"Adjustments",,"Normal profit (Rs.)"),("Profit for the year ended 31st March, 2017",,"(Rs. 1,00,000 - Rs. 10,000)",," 90,000"),("Profit for the year ended 31st March, 2018",,"(Rs. 1,10,000 - Rs. 20,000)",," 1,30,000"),("Profit for the year ended 31st March, 2019*",,"(Rs. 85,000 - Rs. 5,000)",,ul" 80,000"),("Total Normal Profit for lst three years",,,,ulul" 3,00,000"):}`
Average Profit`=("Total Normal Profit")/("Number of Years")=("Rs. 3,00,000")/(3)=` Rs. 1,00,000
Goodwill = Average Profit `xx` No. of Years' Purchase
` " " ` = Rs. 1,00,000 `xx` 2 = Rs. 2,00,000.
* For the valuation of goodwill, Net Profit will not include interest on non-trade investment because it is not an income from business.