Given Information:
- Profits for 5 years (2013-2017)
- Goodwill basis: 4 years' purchase of 5 years' average profits
Calculating Average Profit:
Total Profits = Rs. 4,00,000 + Rs. 3,98,000 + Rs. 4,50,000 + Rs. 4,45,000 + Rs. 5,00,000 = Rs. 21,93,000
Average Profit = Number of YearsTotal Profits = 5Rs. 21,93,000 = Rs. 4,38,600
Calculating Goodwill:
Goodwill = Average Profit × Number of Years' Purchase
Goodwill = Rs. 4,38,600 × 4 = Rs. 17,54,400
The term "4 years' purchase" means the average profit is multiplied by 4 to arrive at the goodwill value. This represents the number of years' profit that a buyer is willing to pay as a premium for acquiring the business.