Practicing Success
Under capitalisation method of calculating goodwill, the term capital refers to: |
Amount standing to the credit of capital account of partners Total assets minus liabilities Total assets excluding goodwill and fictitious assets minus outsiders liabilities Capital calculated on the basis of new partner's capital and his share of profit |
Total assets excluding goodwill and fictitious assets minus outsiders liabilities |
The correct answer is Option (3) → Total assets excluding goodwill and fictitious assets minus outsiders liabilities Capitalisation of Average Profits: Under this method, the value of goodwill is ascertained by deducting the actual firm’s capital in the business from the capitalized value of the average profits on the basis of normal rate of return. This involves the following steps: |