Question : Under the Capitalisation Method of valuation of Goodwill, the formula for calculating goodwill is:
Option 1: Super profits multiplied by the rate of return
Option 2: Average profits multiplied by the rate of return
Option 3: Super profits are divided by the rate of return
Option 4: Average profits divided by the rate of return
Correct Answer: Super profits are divided by the rate of return
Solution : Answer = Super profits divided by the rate of return.
In the Capitalisation Method of goodwill valuation, goodwill is calculated by dividing the super profits by the rate of return. Super profits represent the excess earnings above normal returns, and dividing them by the rate of return helps determine the capitalised value of these excess profits, representing goodwill.
Goodwill = $\frac{\text{super profit}}{\text{rate of return}}\times 100$
Hence, the correct option is 3.
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