Under the average profit method in goodwill accounting, what is the usual way to calculate goodwill?

Correct answer: Goodwill = (Average profit − Normal profit) × Number of years’ purchase

In the average profit method, goodwill is based on earning capacity over normal profit. So first find \(\text{Average profit}\) for the given years, subtract \(\text{Normal profit}\), and then multiply by \(\text{Number of years’ purchase}\). Hence \(\text{Goodwill}=(\text{Average profit}-\text{Normal profit})\times \text{Number of years’ purchase}\).