Which of the following is not a method of valuation of goodwill?

The correct answer is Option (4) → Average super profit capitalization method

Goodwill is valued by three recognised methods: the average profits method, the super profits method and the capitalisation method. The capitalisation method itself works in two ways, by capitalising the average profits or by capitalising the super profits. “Average super profit capitalization method” mixes words from these names and is not a method of its own.

Option (1) Average profit method — A method of valuing goodwill. Goodwill = average profits of past years × agreed number of years’ purchase.

Option (2) Super profits method — A method of valuing goodwill. Goodwill = super profits (average profit minus normal profit) × years’ purchase.

Option (3) Capitalisation method — A method of valuing goodwill. The profits are capitalised at the normal rate of return, and goodwill is the capitalised value less net assets (or the capitalised super profits).