Arrange the Following Steps to Calculate Goodwill under the Super Profits Method-

(A) Calculate the normal profit on the firm's capital on the basis of the normal rate of return

(B) Calculate the average profit

(C) Calculate the super profits by deducting normal profit from the average profits

(D) Calculate goodwill by multiplying the super profits by the given number of years' purchase

Choose the correct answer from the options given below:

Under the Super Profits Method, goodwill is calculated based on the excess earnings (super profits) that a firm generates over and above the normal expected returns.

The correct sequence follows a logical flow:

Step 1 (B): Calculate the average profit of the firm based on past years' performance. This represents the actual earning capacity of the business.

Step 2 (A): Calculate the normal profit using the formula: Normal Profit = Capital Employed × Normal Rate of Return ÷ 100. This represents what the firm should ideally earn at the normal market rate.

Step 3 (C): Calculate super profits using: Super Profit = Average Profit - Normal Profit. This excess represents the additional earning power of the firm, which forms the basis for goodwill valuation.

Step 4 (D): Calculate goodwill using: Goodwill = Super Profit × Number of Years' Purchase. The super profit is capitalized for a specified number of years to arrive at the value of goodwill.

The sequence (B), (A), (C), (D) is necessary because:

• Average profit must be known before comparison
• Normal profit acts as the benchmark for comparison
• Super profit can only be calculated when both figures are available
• Goodwill valuation is the final step using super profit

Correct Answer: Option 3