Question:medium

Weighted average method of calculating goodwill is used when

Show Hint

Weighting favours the most recent, most representative years — relevant only when profits are trending up.
Updated On: Sep 24, 2026
  • Profit is equal
  • Profit has increasing trend
  • Profit has decreasing trend
  • Both (A) and (B)
Show Solution

The Correct Option is B

Solution and Explanation

Step 1: Test each option against the purpose of weighting:
If profit is equal every year (A), weighting changes nothing since all years already agree — simple average alone suffices, so weighting serves no purpose there.

Step 2: Isolate the trend case:
Only when successive years differ, and specifically when later years are more indicative of the business's current earning power (an increasing trend), does assigning larger weights to recent years improve the estimate over a plain average.

Final Answer:
(B) Profit has increasing trend.
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