The important methods of valuation of goodwill are as follows:
(A) Average Profits Method
(B) Normal Profits Method
(C) Super Profits Method
(D) Capitalization Method
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (C) and (D) only
Goodwill is valued by one of three methods: on the basis of average profits, on the basis of super profits (profit above the normal profit), or by capitalisation of average or super profits.
(A) Average Profits Method Correct. Goodwill = average profit of past years × agreed number of years’ purchase.
(B) Normal Profits Method Incorrect. Normal profit is only a step inside the super profits method (capital × normal rate of return); there is no separate method by that name.
(C) Super Profits Method Correct. Goodwill = (average profit − normal profit) × years’ purchase, so it values only the excess earning power.
(D) Capitalization Method Correct. Average profits (or super profits) are capitalised at the normal rate of return, and goodwill is worked out from that value.
NCERT (2026-27 edition): |