There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.

Assertion(A):  Goodwill is an intangible asset. It can be touched or seen.
Reason (R):  The goodwill is calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue.

Assertion (A) is False, but Reason (R) is True

The correct answer is option 4- Assertion (A) is False, but Reason (R) is True.

Assertion(A):  Goodwill is an intangible asset. It can be touched or seen. THIS IS FALSE. Goodwill is considered an intangible asset as it cannot be seen or touched. However, it is not a fictitious asset as it can be sold for money or money’s worth.

Reason (R):  The goodwill is calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue. THIS IS TRUE.  Under the Average Profits Method, the goodwill is valued at agreed number of ‘years’ purchase of the average profits of the past few years. It is based on the assumption that a new business will not be able to earn any profits during the first few years of its operations. Hence, the person who purchases a running business must pay in the form of goodwill a sum which is equal to the profits he is likely to receive for the first few years. The goodwill, therefore, should be calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue.