Question

Under super profit basis, goodwill is calculated by:

• A. No. of years purchased multiplied with average profits
• B. No. of years purchased multiplied with super profits
• C. Summation of the discounted value of expected future benefits
• D. Super profit divided with expected rate of return

Answer 1

The correct option is B No. of years purchased multiplied with super profits

Goodwill is desirable to valued on the basis of the excess profits and not the actual profits. The excess of actual profits over the normal profits is termed as super profits.

Normal Profit = Capital Employed X Normal Rate of Return/100