Arrange the steps in the correct sequence while calculating goodwill by capitalization of average profit method:

(A) Ascertain the actual firm's capital (net assets)

(B) Compute the value of goodwill

(C) compute the capitalized value of the average profits

(D) Ascertain the average profits

Choose the correct answer from the options given below:

In the Capitalization of Average Profit Method, goodwill is calculated using the formula:

Goodwill = Capitalized Value of Average Profits - Actual Capital (Net Assets)

To apply this formula, we need three inputs: Average Profits, Capitalized Value, and Actual Capital.

Logical Flow:

The first step must be ascertaining average profits (D) as this is the base figure needed for capitalization.

The last step must be computing goodwill (B) since it requires subtracting actual capital from capitalized value.

The middle steps involve finding both:

• Capitalized value of average profits (C) = Average Profits × $\frac{100}{Normal Rate of Return}$
• Actual firm's capital/net assets (A) = Total Assets - Total Liabilities

These two steps (A) and (C) can be done in any order as they are independent of each other. Both values are simply required before the final calculation.

Therefore, two sequences are valid:

• (D), (A), (C), (B) - Option 2
• (D), (C), (A), (B) - Option 4

Both maintain the logical requirement: start with average profits, obtain both capitalized value and actual capital (in either order), then calculate goodwill.

Correct Options: 2 and 4