Question

Under which method of valuation of goodwill, normal rate of return is not considered? * a)Loss on sale of fixed assets b)Loss due to fire, earthquake etc c)Undervaluation of closing stock d)All of the above

Answer 1

Answer:

D is the right answer

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Answer 2

Option (c). In the case of "Undervaluation of closing stock," the normal rate of return is not considered.

Explanation:

• Goodwill is the brand value or reputation of a business.

• It is calculated in monetary terms at the time of sales of the business. To purchase goodwill, the acquirer of the business has to pay the monetary value of the goodwill.

• It is calculated as the difference in the amount that an acquirer pays for acquiring the business compared to the market value of that business.

• The normal rate of return is used to calculate goodwill under certain methods. It is the rate at which normally similar businesses are earning profits.

• But when it is the case of "Undervaluation of closing stock," the normal rate of return is not considered because undervaluing the closing stock decreases the year's profit and profit isn't normal anymore.