The correct answer is option 2- (A)-(III), (B)-(I), (C)-(IV), (D)-(II).
LIST I
(Method of valuation of goodwill)
|
LIST II
(Formula)
|
| (A) Average profit method |
(III) Goodwill = Average Profits x No. of years purchased |
| (B) Super Profit Method |
(I) Goodwill = Super profit x No. of years purchased |
| (C) Capitalization of super profit method |
(IV) Goodwill = (Super profit/ Normal Rate of Return) × 100 |
| (D) Capitalization of average profit method |
(II) Goodwill = capitalized value of average profit - actual firm's capital |
(A) Average profit method- (III) Goodwill = Average Profits x No. of years purchased.
This method simply takes the average of past profits for a chosen period and multiplies it by a number of years' purchase to arrive at the goodwill value. It doesn't consider the capital employed in the business
(B) Super Profit Method- (I) Goodwill = Super profit x No. of years purchased.
The average profits (simple or weighted) method of calculating goodwill operates on the assumption that a new business would not generate any profits in its initial years. Consequently, when someone acquires an existing business, they are expected to pay for the anticipated profits for the first few years in the form of goodwill. However, it is argued that the actual benefit for the buyer should not be based on total profits, but rather on the profits exceeding the normal return on capital invested in a similar business. This leads to the suggestion of valuing goodwill based on the excess profits, referred to as super profits. To determine goodwill using this method, the following steps are involved:
* To calculate the particular year profit by adjusting the abnormal profit or abnormal loss.
* Calculate the average profit.
* Determine the normal profit on the firm's capital by applying the normal rate of return.
* Calculate the super profits by subtracting the normal profit from the average profits.
* Calculate goodwill by multiplying the super profits by the specified number of years' purchase.
(C) Capitalization of super profit method- (IV) Goodwill = (Super profit/ Normal Rate of Return) × 100.
Goodwill as per capitalisation of super profit = Super profit x 100/ Normal rate of return.
(D) Capitalization of average profit method- (II) Goodwill = capitalized value of average profit - actual firm's capital.
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:
(1) Ascertain the average profits based on the past few years’ performance.
(2) Capitalize the average profits on the basis of the normal rate of return to ascertain the capitalised value of average profits as follows: Average Profits × 100/Normal Rate of Return
(3) Ascertain the actual firm’s capital (net assets) by deducting outside liabilities from the total assets (excluding goodwill and fictitious assets).
(4) Compute the value of goodwill by deducting net assets from the capitalised value of average profits. | 
