Under which method is the goodwill valued at agreed number of 'years' purchase of the average profits of the past few years?

Average Profits Method

The correct answer is Option (1) → Average Profits Method

Under the Average Profits Method, goodwill is calculated as an agreed number of years’ purchase of the average profits of the past few years.

Goodwill=Average Profit×Number of Years’ Purchase

This means the buyer pays for the ability of the firm to earn those average profits for a certain number of years in the future.