(Average profit Method when Past Adjustments are Made).
Simran purchased Anita's business on 1st April, 2019. It was agreed to value goodwill at three years' purchase of average normal profit of the last four years. The profits of Anita's business for the last four years were:
`{:("Year Ended",,Rs.),("31st March, 2016",," 90,000,"),("31st March, 2017",,"1,60,000,"),("31st March, 2018",,"1,80,000,"),("31st March, 2019",,"2,20,000."):}`
Following further facts are noticed from the books of account that:
1. During the year ended 31st March, 2016, an asset was sold at a gain (profit) fo Rs. 10,000.
2. During the year ended 31st March, 2017, a machine got destroyed in accident and Rs. 30,000 was written off as loss in Profit and Loss Account.
3. During the year ended 31st March, 2018, firm's assets were not insured due to oversight. insurance premium being Rs. 10,000.
Calculate the value of goodwill.

Explanation

Average Profit `=("Total Normal Profit")/("Number of Years")=("RS. 6,65,000")/(4)="Rs. 1,65,000" `
Goodwill `="Average Profit"xx"Number of Years' Purchase" `
` " " ="Rs 1,65,000" xx 3= "Rs. 4,95,000." `
Note: Insurance premium towards insuring assets is a regular/recurring expense. Therefore, it is deducted from the profit for the year ended 31st March, 2018.