Identify the steps involved in calculating goodwill under the capitalization of super profits method:(A) Calculate capital of the firm, which is equal to total assets (excluding goodwill and fictitious assets) minus outside liabilities(B) Multiply the super profits by the required rate of return multiplier(C) Calculate normal profits on capital employed(D) Calculate super profits by deducting normal profits from average profits(E) Calculate average profit for past yearsChoose the correct answer from the options given below:
- A(A), (B), (C), (D), (E)
- B(A), (C), (E), (D), (B)
- C(B), (A), (D), (C), (E)
- D(C), (B), (D), (A), (E)
Solution & Step-by-step Explanation
Let's follow the standard calculation sequence for the Capitalization of Super Profit method:Step 1: Calculate the capital employed/capital of the firm (A)Step 2: Compute normal profits on that capital employed (C)Step 3: Determine the average historical profits of the firm (E)Step 4: Subtract normal profit from average profit to get Super Profit (D)Step 5: Multiply the super profit by the reciprocal capitalization multiplier () to evaluate Goodwill (B)This matches the sequence (A), (C), (E), (D), (B).