Identify the steps involved in calculating goodwill under the capitalized value of average profits method:(A) Capitalize the average profits on the basis of the normal rate of return to ascertain the capitalized value of average profits(B) Ascertain the average profits based on the past few years' performance(C) Compute the value of goodwill by deducting net assets from the capitalized value of average profits(D) Ascertain the actual firm's capital (net assets) by deducting outside liabilities from the total assets (excluding goodwill and fictitious assets)Choose the correct answer from the options given below:
- A(A), (B), (C), (D)
- B(A), (D), (C), (B)
- C(B), (A), (D), (C)
- D(C), (B), (D), (A)
Solution & Step-by-step Explanation
The step-by-step procedure for the Capitalization of Average Profits Method is:Step 1: Compute the average profits of the past years (B)Step 2: Capitalize these average profits using the Normal Rate of Return formula: (A)Step 3: Determine the actual net capital employed (Net Assets) of the firm (D)Step 4: Subtract net assets from the capitalized value to compute Goodwill (C)Thus, the proper sequence is (B), (A), (D), (C).