- 1 Marks
Question
The partnership of A, B, and C made a net profit for the past five years as shown below:
| Year | Profit (N’000) |
|---|---|
| 2014 | 30,000 |
| 2015 | 18,000 |
| 2016 | 9,000 |
| 2017 | 15,000 |
| 2018 | 21,000 |
The firm wishes to admit D, for this reason it has decided that the fair value of goodwill is 4 years purchase of the average super profits over the last 5 years. The normal profit is N6,000,000 per annum.
What is the value of goodwill?
A. N42,400
B. N46,400
C. N49,200
D. N50,400
E. N62,200
Answer
D. N50,400
Explanation:
To calculate goodwill, first determine the average profit for the past five years, then subtract the normal profit to get the super profit. Multiply the super profit by 4 to arrive at the value of goodwill:
- Average profit: (30,000 + 18,000 + 9,000 + 15,000 + 21,000) / 5 = N18,600
- Super profit: N18,600 – N6,000 = N12,600
- Goodwill: N12,600 × 4 = N50,400
- Tags: Goodwill Valuation, Partnership Accounting, Super Profit
- Level: Level 1
- Uploader: Dotse