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Under Capitalization basis goodwill is calculated by :
- a)Average profits x years of purchase
- b)Super profits x years of purchase
- c)Total of the discounted value of expected future benefits
- d)Super profit divided with expected rate of return
Correct answer is option 'D'. Can you explain this answer?
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Under Capitalization basis goodwill is calculated by :a)Average profit...
Under Capitalization basis goodwill calculation:
Goodwill is calculated under the Capitalization basis by using the concept of super profits. Super profits are the excess profits earned by a business over and above the normal rate of return. The formula for calculating goodwill under the Capitalization basis is:
Goodwill = Super profit / Expected rate of return
Explanation:
Super profit:
- Super profit is calculated by subtracting the normal rate of return from the actual profits earned by the business. It represents the additional earnings generated by the business due to factors such as reputation, location, customer base, etc.
Expected rate of return:
- The expected rate of return is the rate of return that an investor would normally expect to earn on their investment. It is used as a benchmark to determine the excess profits (super profits) earned by the business.
Calculation:
- The super profit is divided by the expected rate of return to arrive at the goodwill amount. This calculation helps in determining the value of the intangible assets such as reputation, customer loyalty, brand value, etc., that contribute to the business's profitability.
Conclusion:
- By calculating goodwill under the Capitalization basis using the super profit divided by the expected rate of return formula, businesses can assess the value of their intangible assets and understand the excess earnings generated due to these factors. This calculation helps in determining the fair value of the business and its potential for future growth and profitability.
Goodwill is calculated under the Capitalization basis by using the concept of super profits. Super profits are the excess profits earned by a business over and above the normal rate of return. The formula for calculating goodwill under the Capitalization basis is:
Goodwill = Super profit / Expected rate of return
Explanation:
Super profit:
- Super profit is calculated by subtracting the normal rate of return from the actual profits earned by the business. It represents the additional earnings generated by the business due to factors such as reputation, location, customer base, etc.
Expected rate of return:
- The expected rate of return is the rate of return that an investor would normally expect to earn on their investment. It is used as a benchmark to determine the excess profits (super profits) earned by the business.
Calculation:
- The super profit is divided by the expected rate of return to arrive at the goodwill amount. This calculation helps in determining the value of the intangible assets such as reputation, customer loyalty, brand value, etc., that contribute to the business's profitability.
Conclusion:
- By calculating goodwill under the Capitalization basis using the super profit divided by the expected rate of return formula, businesses can assess the value of their intangible assets and understand the excess earnings generated due to these factors. This calculation helps in determining the fair value of the business and its potential for future growth and profitability.
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Under Capitalization basis goodwill is calculated by :a)Average profits x years of purchaseb)Super profits x years of purchasec)Total of the discounted value of expected future benefitsd)Super profit divided with expected rate of returnCorrect answer is option 'D'. Can you explain this answer?
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Under Capitalization basis goodwill is calculated by :a)Average profits x years of purchaseb)Super profits x years of purchasec)Total of the discounted value of expected future benefitsd)Super profit divided with expected rate of returnCorrect answer is option 'D'. Can you explain this answer? for CA Foundation 2025 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Under Capitalization basis goodwill is calculated by :a)Average profits x years of purchaseb)Super profits x years of purchasec)Total of the discounted value of expected future benefitsd)Super profit divided with expected rate of returnCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Under Capitalization basis goodwill is calculated by :a)Average profits x years of purchaseb)Super profits x years of purchasec)Total of the discounted value of expected future benefitsd)Super profit divided with expected rate of returnCorrect answer is option 'D'. Can you explain this answer?.
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