Multiple choice

The net profits of a business are Rs. 1,50,000, Rs. 1,75,000 and Rs. 2,75,000 in the last 3 years. These include an investment income @ 20% p.a. of Rs. 20,000 every year, but exclude the annual insurance premium payable Rs. 10,000. Goodwill is to be valued at 1½ year purchase of average profits of 3 years. Calculate the value of goodwill.

  1. Rs. 2,85,000

  2. Rs. 3,15,000

  3. Rs. 2,55,000

  4. Rs. 3,45,000
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The average profits after deduction of interest and insurance premium are Rs. 1,70,000. Thus, goodwill = 1½ x 1,70,000 = 2,55,000

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