Arrange the steps involved under the super profit method of calculating goodwill in the correct sequence:(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 profitsChoose the correct answer from the options given below:
- A(A), (B), (C), (D)
- B(B), (C), (A), (D)
- C(B), (A), (D), (C)
- D(C), (B), (D), (A)
Solution & Step-by-step Explanation
The process to find goodwill using the super profit method follows these steps:(B) Calculate the average profit: Determine the historical adjusted earning capacity.(A) Calculate the normal profit: Find expected returns on the capital employed ().(D) Calculate the super profits: Find the excess earnings ().(C) Calculate goodwill: Multiply the super profit by the number of years' purchase.The correct chronological order is (B), (A), (D), (C).