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:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (B), (A), (D), (C)
Under capitalisation of average profits the steps are:
(B) Ascertain the average profits based on the past few years' performance.
(A) Capitalise the average profits at the normal rate of return to get the capitalised value of average profits.
(D) Ascertain the actual firm's capital (net assets): total assets (excluding goodwill and fictitious assets) minus outside liabilities.
(C) Compute goodwill: capitalised value of average profits minus net assets.
NCERT (2026-27 edition):
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