Question

Under superprofit basis goodwill is calculated by

• A. Purchase year $\times$ Average profit
• B. Purchase year $\times$ Superprofit
• C. Purchase year $+$ Average profit
• D. None of these

Hint:

Always connect “superprofit method” with “excess profits” and multiply it by the number of years’ purchase to find goodwill.

Answer 1

The Correct Option is B

Step 1: Recall the concept of goodwill valuation.
Goodwill can be valued using different methods such as Average Profit Method, Superprofit Method, and Capitalization Method. The superprofit method is based on excess profit earned compared to normal expected profit.
Step 2: Formula for Superprofit.
Superprofit = Actual Average Profit $-$ Normal Profit.
Normal profit is calculated as Capital Employed $\times$ Normal Rate of Return (NRR).
Step 3: Formula for Goodwill under Superprofit method.
\[ \text{Goodwill} = \text{Superprofit} \times \text{Number of years’ purchase} \]
Step 4: Match with options.
Here, “Number of years’ purchase” is referred to as “Purchase year”. Hence, goodwill = Purchase year $\times$ Superprofit.
Step 5: Conclude.
Therefore, option (B) is the correct one.
Final Answer: \[ \boxed{\text{Purchase year $\times$ Superprofit}} \]