Arrange the steps in proper sequence to calculate Goodwill through 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) Multiply super profits by the given number of years purchased.

Choose the correct answer from the options given below:

To calculate Goodwill through Super Profits Method, we follow this logical sequence:

Step (B) - Calculate the average profit

This represents the actual earning capacity of the firm. Average Profit is calculated from past years' profits (usually 3-5 years) after necessary adjustments.

Step (A) - Calculate the normal profit

Normal Profit = Capital Employed × $\frac{\text{Normal Rate of Return}}{100}$

This represents what the firm should ideally earn on its capital employed at the prevailing normal rate in the industry.

Step (C) - Calculate the super profits

Super Profit = Average Profit - Normal Profit

Super profit is the excess earning over and above the normal profit. This excess earning is the basis for valuing goodwill.

Step (D) - Multiply super profits by number of years purchased

Goodwill = Super Profit × Number of Years' Purchase

The super profit is multiplied by a agreed number of years to arrive at the value of goodwill.

The correct sequence is (B), (A), (C), (D) which corresponds to Option 3.

The logic is simple: we first find what the firm actually earns (average profit), then what it should normally earn (normal profit), then the excess (super profit), and finally convert this excess into a capital value (goodwill).