Arrange the following steps for calculating Goodwill under Capitalisation of Average Profits Method in correct sequence:(A). Ascertain the actual firm's capital (net assets) by deducting outside liabilities from the total assets.(B). Compute the value of goodwill by deducting net assets from the capitalised value of average profits.(C). Ascertain the average profits based on the past few years' performance.(D). Capitalize the average profits on the basis of the normal rate of return to ascertain the capitalised value of average profits.Choose the correct answer from the options given below:
- A(D), (B), (C), (A)
- B(B), (C), (D), (A)
- C(D), (A), (D), (C)
- D(C), (D), (A), (B)
Solution & Step-by-step Explanation
To calculate goodwill using the Capitalisation of Average Profits Method, follow these sequential phases:Step 1: Ascertain the average profit earned by the firm over the past consecutive years (C).Step 2: Determine the Capitalised Value of Average Profits using the formula: (D).Step 3: Compute the actual Net Assets / Capital Employed of the business by subtracting outside liabilities from the total assets (A).Step 4: Calculate Goodwill by subtracting the Net Assets from the Capitalised Value of Average Profits (B).The sequence is (C), (D), (A), (B).