Under capitalisation method, goodwill is calculated by

The correct answer is: A. Number of years purchase × Average profit.

Goodwill is an intangible asset that arises from the reputation and customer base of a business. It is not recorded on the balance sheet, but is instead calculated using the capitalization method.

The capitalization method calculates goodwill by multiplying the average profit of the business by the number of years that the business is expected to continue to generate that profit. The expected rate of return is not used in the capitalization method.

Here is a brief explanation of each option:

• Option A: Number of years purchase × Average profit. This is the correct answer. The capitalization method calculates goodwill by multiplying the average profit of the business by the number of years that the business is expected to continue to generate that profit.
• Option B: Number of years purchase × Super profit. Super profit is the excess of the actual profit of a business over the normal profit that could be expected from a business of similar size and nature. The capitalization method does not use super profit.
• Option C: Average profit + Expected rate of return. This is not the correct answer. The expected rate of return is not used in the capitalization method.
• Option D: Super profit + Expected rate of return. This is not the correct answer. The expected rate of return is not used in the capitalization method.