Under which method is the goodwill valued at agreed number of 'years' purchase of the average profits of the past few years?
Answer & explanation
Correct answer: option 1
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.