Question

Weighted average method of calculating goodwill is used when __________.

• A. Profits are not equal
• B. Profits has increasing trend
• C. Profits has decreasing trend
• D. Either b or c

Answer 1

Answer: (D)

Either b or c

In average method of calculating goodwill , profits of past few years are averaged and adjusted for any expected change in future. For averaging the past profit, either simple average or weighted average may be employed depending upon the circumstances. If there exist a clear increasing or decreasing trend of profits, it is better to give more weight to the profits of recent years than those of earlier years. But, if there is no trend of profit, it is better to go by simple average.