While valuing goodwill, which item should be deducted from average profit if it will continue in the future?

Correct answer: Normal manager’s salary

Goodwill valuation is based on maintainable future profit, not merely the profit reported in a past year. A normal manager’s salary is a recurring business expense that will continue in future periods. If it was omitted from a past year’s accounts, or if the question asks for adjusted profit, that salary must be deducted from average profit to arrive at maintainable profit. Therefore option A is correct. A past fire loss is normally abnormal and may be added back, an abnormal gain on sale of an old machine is removed from past profit rather than treated as a continuing expense, and a one-time insurance claim is non-recurring income that is excluded. Only the manager’s normal salary is a continuing cost here.