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CA Foundation · Accounting · Partnership and LLP Accounts

Under the capitalisation of average profit method, goodwill equals:

Goodwill under the capitalisation of average profit method is the capitalised value of the average profit, found by dividing it by the normal rate of return, minus the firm's net assets or capital employed. The excess is the value of goodwill.

  1. ACapitalised value of average profit minus net assets of the firmCorrect
  2. BAverage profit multiplied by the number of years' purchase minus liabilities
  3. CSuper profit multiplied by the normal rate of return
  4. DNormal profit divided by average profit

Explanation

Under the capitalisation method, average profit is capitalised at the normal rate (average profit × 100/normal rate) to give the capitalised value of the firm. Goodwill is the excess of this value over actual net assets (capital employed). The other options mix up other methods or are not valid formulas.

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