Identify the steps involved in calculating goodwill under the capitalized value of average profits method:

(A) Capitalize the average profits on the basis of the normal rate of return to ascertain the capitalized value of average profits
(B) Ascertain the average profits based on the past few years' performance
(C) Compute the value of goodwill by deducting net assets from the capitalized value of average profits
(D) Ascertain the actual firm's capital (net assets) by deducting outside liabilities from the total assets (excluding goodwill and fictitious assets)

Choose the correct answer from the options given below:

(B), (A), (D), (C)

The correct answer is Option (3) → (B), (A), (D), (C)

Under the Capitalized Value of Average Profits Method, goodwill is calculated as follows :

1. (B) ➤ Ascertain the average profits based on the past few years’ performance. This gives the firm’s maintainable average profit.

2. (A) ➤ Capitalize the average profits at the normal rate of return to find the capitalized value of average profits.

   Capitalized Value= (Average Profits×100) / Normal Rate of Return​

3. (D) Ascertain the actual capital (net assets) by deducting outside liabilities from total assets (excluding goodwill and fictitious assets).

4. (C) Compute goodwill by deducting the actual capital from the capitalized value of average profits.

   Goodwill=Capitalized Value of Average Profits−Net Assets