Choose the correct order in calculation of the goodwill of the firm by Super Profit Method.
A. Calculation of Super Profit
B. Calculation of Normal Profit
C. Calculation of Capital Employed by the firm
D. Calculation of goodwill of the firm
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
Correct answer: Option (2) → C, B, A, D
Concept: Under the Super Profit Method, goodwill = Super Profit × number of years’ purchase, where super profit = actual/average profit – normal profit, as explained in Reconstitution of a Partnership Firm – Admission of a Partner.
The logical sequence is: first find (C) Capital Employed by the firm; then (B) Normal Profit = Capital Employed × Normal Rate of Return; then (A) Super Profit = Actual Profit – Normal Profit; and finally (D) Goodwill of the firm = Super Profit × years’ purchase. Hence the order is C, B, A, D.