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CA Foundation · Accounting · Partnership and LLP Accounts

In the super profit method of valuing goodwill, super profit is defined as:

Super profit is the average profit of the firm minus the normal profit that is expected on the capital employed. It is the extra earning above the normal rate of return, and goodwill under this method is calculated as a number of years' purchase of this excess.

  1. AAverage profit minus normal profitCorrect
  2. BNormal profit minus average profit
  3. CAverage profit plus normal profit
  4. DTotal capital employed minus average profit

Explanation

Super profit is the excess of the firm's average (expected future maintainable) profit over the normal profit expected on the capital employed. Option B reverses the subtraction and would give a negative figure when the firm earns more than normal. Goodwill is then computed as a multiple of super profit under this method.

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