Question

Weighted average method of calculating goodwill should be followed when ___________.

• A. Profits are uneven
• B. Profits has increasing trend
• C. Profits has decreasing trend
• D. Either (B) or (C)

Answer 1

The correct option is D Either (B) or (C)

In case of the average method of calculating goodwill, profits of the 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 exists clear increasing or decreasing trend of profits, it is better to give more weight to the profits of the recent years than those of earlier years. But, if there is no clear trend of profit, it is better to go by simple average.