Question : Identify the correct order for calculating goodwill under Capitalisation of Average Profit Method:
(i) Calculate capitalised value of the firm
(ii) Ascertain the value of net assets, on the date of valuation of goodwill
(iii) Calculate average profit earned
(iv) Find the difference between capitalised value of the firm and net assets
Option 1: (i), (ii), (iii), (iv)
Option 2: (ii), (iii), (iv), (i)
Option 3: (iii), (i), (ii), (iv)
Option 4: (iv), (iii), (ii), (i)
Correct Answer: (iii), (i), (ii), (iv)
Solution :
For calculating goodwill under Capitalisation of Average Profit Method:
(iii) Calculate average profit earned
(i) Calculate capitalised value of the firm
(ii) Ascertain the value of net assets, on the date of valuation of goodwill
(iv) Find the difference between capitalised value of the firm and net assets.
Hence, the correct option is 3.
