Arrange the steps involved under the super profit method of calculating goodwill-
(A) Calculate the normal profit on the firm's capital on the basis of the normal rate of return
(B) Calculate the average profit
(C) Calculate goodwill by multiplying the super profits by the given number of years' purchase
(D) Calculate the super profits by deducting normal profit from the average profits
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)
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(B) Average profit from past years
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(A) Normal profit = Capital employed × Normal rate
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(D) Super profit = Average − Normal
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(C) Goodwill = Super profit × Years’ purchase