Practicing Success
What is the formula for calculating goodwill through Average profit method? |
No. of years purchase/Average profit Average profit x No. of years purchase Total of the discounted value of expected future profit Average profit / No. of years purchase |
Average profit x No. of years purchase |
The correct answer is option 2- Average profit x No. of years purchase. The average profits method of calculating goodwill operates on the assumption that a new business would not generate any profits in its initial years. Consequently, when someone acquires an existing business, they are expected to pay for the anticipated profits for the first few years in the form of goodwill. The steps to calculate the goodwill by average method is- |