Arrange the following steps in the correct logical sequence to calculate Goodwill using the Super Profits Method:(A) Calculate the normal profit on the firm's capital based on the normal rate of return.(B) Calculate the average historical maintainable profit.(C) Calculate the super profits by deducting normal profit from the average profit.(D) Calculate goodwill by multiplying the super profit by the specified number of years' purchase.Choose the correct answer from the options given below:
- A(A), (C), (D), (B)
- B(B), (D), (A), (C)
- C(B), (A), (C), (D)
- D(C), (B), (D), (A)
Solution & Step-by-step Explanation
To calculate goodwill using the Super Profit Method, follow these steps in order:Step 1 (B): Compute the firm's Average Profit based on historical performance trends.Step 2 (A): Compute the Normal Profit using the formula:
Step 3 (C): Calculate the Super Profit by finding the excess of average profits over normal profits:
Step 4 (D): Calculate Goodwill by multiplying the super profit by the years' purchase:
This gives the sequence: (B), (A), (C), (D).
Step 3 (C): Calculate the Super Profit by finding the excess of average profits over normal profits:
Step 4 (D): Calculate Goodwill by multiplying the super profit by the years' purchase:
This gives the sequence: (B), (A), (C), (D).