Question

Under capitalization method, goodwill is calculated by :
A Average Profit x No. of Years’ Purchase
B  Super Profit x No. of Years’ Purchase
C Total of the discounted value of expected future benefits
D  Super Profit *100/Rate of return ​

Answer 1

Answer:

Option B. Super profit x number of year's purchase

Answer 2

ANSWER :

❖ D. Super Profit × 100 / Rate of Return

• ➺ Under capitalization method, goodwill is calculated by : Super Profit × 100 / Rate of Return

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EXPLANATION :

❒ Capitalization Method :-

• ➻ Capitalization Method is a method of calculating the value of Goodwill of a firm.

• ➻ There are two different ways of calculating the value of Goodwill of a firm. These are : (i) By Capitalizing the Average Profit of the firm and (ii) By Capitalizing the Super Profit of the firm.

❒ Valuation of Goodwill under Capitalization Method by Capitalizing the Average Profit of the firm :-

• ✎ Under Capitalization Method by Capitalizing the Average Profit of the firm, the total value of the firm is calculated first by capitalization of the average profit of the firm. The amount so obtained is known as Total Value of the firm or Capitalized value of Average Profit. After this, the amount of Net Capital Employed in the firm or Net Tangible Assets of the firm is calculated. Then by deducting the amount of Net Capital Employed in the firm or Net Tangible Assets of the firm from Total Value of the firm or Capitalized value of Average Profit, the value of Goodwill of the firm is ascertained.

❍ Required Formulas :-

• ★ Total Value of the Firm or Capitalized Value of Average Profit = Average Profit of the firm × 100 / Normal Rate of Return

• ★ Net Capital Employed or Net Tangible Assets = Tangible Assets - External Liabilities

• ★ Value of Goodwill = Total Value of the Firm or Capitalized Value of Average Profit - Net Capital Employed or Net Tangible Assets

❒ Valuation of Goodwill under Capitalization Method by Capitalizing the Super Profit of the firm :-

• ✎ Under Capitalization Method by Capitalizing the Average Profit of the firm, to calculate the value of Goodwill, the Capitalized value of Super Profit of the firm is taken. Super Profit of a firm is calculated by deducting the Normal Profit of the firm from the Average Profit of the firm. After calculating the Super Profit, the Capitalized value of Super Profit is calculated and the amount so obtained is treated as the value of Goodwill.

❍ Required Formulas :-

• ★ Normal Profit = Total Capital Employed × Normal Rate of Return / 100

• ★ Super Profit = Average Profit - Normal Profit

• ★ Capitalized value of Super Profit = Super Profit × 100/ Normal Rate of Return

• ★ Value of Goodwill = Capitalized value of Super Profit

Or,

• ★ Value of Goodwill = Super Profit × 100/ Normal Rate of Return