Question

Under the capitalisation method, the formula for calculating the goodwill is ______.

Options

• Super profits multiplied by the normal rate of return.

• Capital employed multiplied by the normal rate of return.

• Super profits divided by the normal rate of return.

• Capital employed divided by the normal rate of return.

Answer 1

Under the capitalisation method, the formula for calculating the goodwill is super profits divided by the normal rate of return.

Explanation:

Under the capitalisation method, goodwill is calculated in two ways:

(1) Capitalisation of Average Profits Method:

Goodwill = Capitalised Value of Average Profits − Net Assets (Capital Employed)

(2) Capitalisation of Super Profits Method:

Goodwill = `"Super Profit" xx 100/"Normal Rate of Return"`