In which situation is the need for goodwill most clearly seen?

Correct answer: When the firm earns more than normal profit

The governing idea is that goodwill measures the advantage arising from a firm’s favourable reputation, customer relationships and special earning capacity. A firm that earns more than the normal profit earned by comparable businesses possesses some valuable benefit, such as loyal customers, efficient management, superior products or a good location. Goodwill attempts to place a value on that benefit. Therefore option A gives the clearest situation in which goodwill is relevant. Zero sales, loss of all customers and continuous closure indicate absence or deterioration of earning capacity rather than the existence of positive goodwill. They may reduce goodwill to a very low amount or make it worthless, but they do not demonstrate its need as clearly as supernormal profitability does.