Goodwill can be calculated using different methods, including the Super Profit Method, Average Profit Method, and Capitalization Method. Here's an overview of each method:

Super Profit Method:

The Super Profit Method calculates goodwill by comparing the actual profit of a business with the normal or average profit that a similar business would generate based on its capital employed. The formula is: Goodwill=Super Profit×Number of Years of PurchaseGoodwill=Super Profit×Number of Years of Purchase

Where Super Profit=Actual Average Profit−Normal Average ProfitSuper Profit=Actual Average Profit−Normal Average Profit

Example:

• Actual Average Profit = $50,000
• Normal Average Profit (calculated based on capital employed and industry norms) = $40,000
• Super Profit = $50,000 - $40,000 = $10,000
• If the agreed number of years of purchase is 3, Goodwill = $10,000 \times 3 = $30,000

Average Profit Method:

The Average Profit Method calculates goodwill based on the average profits of a business over a certain number of years. The formula is: Goodwill=Average Profit×Number of Years of PurchaseGoodwill=Average Profit×Number of Years of Purchase

Example:

• Average Profit (based on the last few years) = $45,000
• If the agreed number of years of purchase is 4, Goodwill = $45,000 \times 4 = $180,000

Capitalization Method:

The Capitalization Method calculates goodwill by capitalizing the excess earnings of a business. The formula is: Goodwill=Excess EarningsCapitalization RateGoodwill=Capitalization RateExcess Earnings​

Where Excess Earnings=Actual Average Profit−(Normal Rate of Return×Capital Employed)Excess Earnings=Actual Average Profit−(Normal Rate of Return×Capital Employed)

Example:

• Actual Average Profit = $50,000
• Normal Rate of Return (industry standard) = 10%
• Capital Employed = $500,000
• Excess Earnings = $50,000 - (0.10 \times $500,000) = $50,000 - $50,000 = $0
• If the Capitalization Rate is 20%, Goodwill = 00.200.200​ = $0

It's important to note that these methods have their strengths and limitations, and the choice of method may depend on the nature of the business and the available information. Consulting with a financial professional or a business valuation expert is recommended for accurate calculations.