Goodwill is to be valued at three years' purchase of four years' average profit. Profits for last four years ending on 31st March of the firm were:
2019 −  ` 12,000; 2020 −  ` 18,000;2021 −  ` 16,000; 2022 −  ` 14,000.
Calculate amount of Goodwill.

Goodwill= Average profit × no. of purchases years’

Average profit = total profit of past given years/number of years

Average profit =12,000+18,000+16,000+14,000/4=15,000

Number of years’ purchase = 3

Goodwill= Average profit × no. of purchases years’

Goodwill= 15,000 × 3=45,000

Profits for the five years ending on 31st March, are as follows:
Year 2018 −  ` 4,00,000; Year 2019 −  ` 3,98,000; Year 2020 −  ` 4,50,000; Year 2021 −  ` 4,45,000 and Year 2022 −  ` 5,00,000.
Calculate goodwill of the firm on the basis of 4 years' purchase of 5 years' average profit.

Goodwill=Average Profit×Number of Years' Purchase

Average Profits = Total Profit÷Number of Years

Average Profits = 4,00,000+3,98,000+4,50,000+4,45,000+5,00,000÷5

Average Profits = 21,93,000÷5= ` 4,38,600

Goodwill =4,38,600×4= ` 17,54,400

Calculate value of goodwill on the basis of three years' purchase of average profit of the preceding five years which were as follows:

Goodwill= Average profit × no. of purchases years’

Average profit = total profit of past given years/number of years

Average profit =8,00,000+15,00,000+18,00,000-4,00,000 (Loss)+ 13,00,000/5=50,00,000

Average profit =50,00,000/5÷10,00,000

Number of years’ purchase = 3

Goodwill= Average profit × no. of purchases years’

Goodwill= 10,00,000 × 3=30,00,000

Annu, Baby and Chetan are partners in a firm sharing profits and losses equally. They decide to take Deep into partnership from 1st April, 2022 for 1/5th share in the future profits. For this purpose, goodwill is to be valued at 100% of the average annual profits of the previous three or four years, whichever is higher. The annual profits for the purpose of goodwill for the past four years were:

Calculate the value of goodwill.

Average Profits of Previous three years= 2,88,000+1,81,8000+1,87,200÷3= ` 2,19,000
Average Profits of Previous four years= 2,88,000+1,81,800+1,87,200+2,53,200÷4=  ` 2,27,550
Since, the average profits of previous four years is greater than the average profits of previous three years.
Hence, Goodwill = 100% of Average Profits of Previous four years =  ` 2,27,550

Calculate the value of firm's goodwill on the basis of one and half years' purchase of the average profit of the last three years. The profit for first year was  ` 1,00,000, profit for the second year was twice the profit of the first year and for the third year profit was one and half times of the profit of the second year.

Goodwill=Average Profit×No. of years' purchase               

=2,00,000×1.5= ` 3,00,000

Working Notes:

WN: 1 Calculation of Profits of last three years

WN: 2 Calculation of Average Profit

Average Profit=Total Profits for past given years/Number of Years

Average Profit =6,00,000/3= ` 2,00,000