Under the Super Profits Method, goodwill is calculated using the formula:
Goodwill = Super Profits × Number of Years' Purchase
where Super Profits = Average Profits - Normal Profits
The logical sequence of steps must follow the dependencies in the calculation:
(A) Calculate the average profit → This is computed first from past years' profits. Average profit is needed to determine super profits.
(B) Calculate the normal profit on the firm's capital → Normal Profit = Capital Employed × (Normal Rate of Return/100). This represents the profit expected from the capital invested at normal industry rates.
(D) Calculate the super profits → Super Profits = Average Profits - Normal Profits. This step requires both values from steps A and B, so it comes next.
(C) Calculate goodwill → Goodwill = Super Profits × Number of Years' Purchase. This is the final step as it requires super profits from step D.
The correct sequence is (A), (B), (D), (C), which is Option 3.