The important methods of valuation of goodwill are as follows:
(A) Average Profits Method
(B) Normal Profits Method
(C) Super Profits Method
(D) Capitalization Method
Choose the correct answer from the options given below:
The important methods of valuation of goodwill are as follows:
(A) Average Profits Method
(B) Normal Profits Method
(C) Super Profits Method
(D) Capitalization Method
Choose the correct answer from the options given below:
Solution
The standard methods for valuation of goodwill as per accounting principles are being tested here.
Average Profits Method (A) is a valid method where goodwill = Average Profits × Number of Years' Purchase. This is widely used and accepted.
Normal Profits Method (B) is not an independent method of goodwill valuation. While 'Normal Profit' is a concept used in calculations, there is no separate method called "Normal Profits Method". Normal profit is calculated as Capital Employed × Normal Rate of Return, which is then used in the Super Profits Method for comparison purposes.
Super Profits Method (C) is a valid method where goodwill = Super Profits × Number of Years' Purchase, where Super Profits = Average Profits - Normal Profits.
Capitalization Method (D) is a valid method with two variants:
- Capitalization of Average Profits
- Capitalization of Super Profits
The formula used is:
Since Normal Profits Method is not an independent method of goodwill valuation, only (A), (C) and (D) are the important methods.
Correct Answer: Option 2
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