Question

Under which method of valuation of Goodwill, normal rate of return is not required?

• A. Capitalization Method
• B. Super Profit Method
• C. Average Profit Method
• D. None of these

Hint:

In valuation methods, always differentiate between those that rely on the normal rate of return and those that do not. The Capitalization Method falls into the latter category.

Answer 1

The Correct Option is A

Step 1: Understanding the methods of valuation.
In the valuation of goodwill, some methods require the normal rate of return, while others do not. The Capitalization Method does not require the normal rate of return to calculate the value of goodwill.
Step 2: Analyzing the options.
(A) Capitalization Method: Correct — In this method, goodwill is valued based on the capitalized amount of the expected earnings, without using a normal rate of return.
(B) Super Profit Method: This method requires the normal rate of return to calculate super profits and is therefore incorrect.
(C) Average Profit Method: This method also involves using an average profit, but it does not exclude the normal rate of return, making it incorrect.
(D) None of these: This is incorrect because the Capitalization Method is the correct answer.
Step 3: Conclusion.
The correct answer is (A) Capitalization Method, as this method does not require the normal rate of return.