How the goodwill is valued under the ave...

How the goodwill is valued under the average profits method ?

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Under this method normmal past profits of the business for a number of years are totalled and average is calculated. Goodwill is then calculated by multiplying the average profits by agreed number of year purchasse (such as two or three).

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A business has earned average profit fo Rs. 4,00,000 during the last few years and the normal rate of return in similar business is 10% . Find value of goodwill by: (i) Capitalisation of Super Profit Method, and (ii) Super Profit Method if the goodwill is valued at 3 years' purchase of super profits. Assets of the business were Rs. 40,00,000 and its external liabilities Rs. 7,20,000.

Sara, Tara and Zara are partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. They decide to take Dara into partnership from 1st April, 2019 for 1/4th share in the profits. For this purpose, goodwill is to be valued at twice the average annual profit of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were: {:("Year Ended",,"Rs."),("31st March, 2019",," 48,000,"),("31st March, 2018",," 30,000,"),("31st March, 2017",," 31,200,"),("31st March, 2016",," 42,000".):} Calculate value of goodwill.

How the goodwill is valued under the average profits method ?

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