Under the Average Profit Method, goodwill is calculated by multiplying the average profit with the agreed number of years of purchase.
Formula: Goodwill = Average Profit × Number of Years' Purchase
Given information:
- Average Profit = Rs. 20,000
- Number of years for which profits are expected to continue = 3 years
Applying the formula:
Goodwill = Rs. 20,000 × 3
Goodwill = Rs. 60,000
The number of years' purchase represents the period for which the buyer is willing to pay for the future profit-earning capacity of the business. Since the profits are expected to continue for 3 years, the goodwill is valued at 3 times the average annual profit.
Correct Option: 1 (Rs. 60,000)