Arrange the steps of the method "Capitalization of Average Profits" for the calculation of goodwill in the correct sequence:(A) Capitalize the average profits on the basis of the normal rate of return to ascertain the capitalized value of average profits as follows: (B) Ascertain the average profits based on the past few years' performance.(C) Ascertain the actual firm's capital (net assets) by deducting outside liabilities from the total assets (excluding goodwill and fictitious assets).(D) Compute the value of goodwill by deducting net assets from the capitalized value of average profits.Choose the correct answer from the options given below:
- A(A), (B), (C), (D)
- B(A), (C), (B), (D)
- C(B), (A), (C), (D)
- D(C), (B), (D), (A)
Solution & Step-by-step Explanation
The standard order of execution to value goodwill under the Capitalization of Average Profit method is:Step 1: Ascertain the average operational profits of the past years (B).Step 2: Compute the Capitalized Value of these average profits using the normal rate of return formula (A).Step 3: Measure the Net Assets or Actual Capital Employed of the firm (C).Step 4: Deduct Net Capital Employed from Capitalized Value to arrive at total Goodwill (D).Thus, the proper order is (B), (A), (C), (D).