Match List I with List II and select the correct answer using codes given below the lists:
List-I - List-II
(a) Goodwill - : (i) Purchases consideration - Net assets
(b) Super profit - (ii) Capital employed x Normal rate of return
(c) Normal profit - (iii) Cat nature goodwill
(d) Institutional goodwill. - (iv) Actual Average profit - Normal profit

Question

Match List I with List II and select the correct answer using codes given below the lists: 
List-I - List-II
(a) Goodwill - : (i) Purchases consideration - Net assets
(b) Super profit - (ii) Capital employed x Normal rate of return
(c) Normal profit -  (iii) Cat nature goodwill
(d) Institutional goodwill. - (iv) Actual Average profit - Normal profit

Accepted Answer

The correct option is 3:
This option correctly matches the fundamental concepts of goodwill valuation and classification. For **(a) Goodwill**, when it is *purchased* from another business, its value is derived as the excess of the price paid (Purchase Consideration) over the fair value of the net tangible assets acquired, which is represented by **(i) Purchases consideration - Net assets**. **(b) Super profit** is the core component in many valuation methods for goodwill, calculated as the additional profit a business earns above what is considered the industry average, hence it equals **(iv) Actual Average profit - Normal profit**. **(c) Normal profit** is the baseline expected return on investment, which is correctly calculated as the product of **(ii) Capital employed x Normal rate of return**. Finally, **(d) Institutional goodwill** is a classification based on the nature of the business and its attachment to a location, brand, or institution, often referred to by the traditional name **(iii) Cat nature goodwill**, where customers are loyal to the business location like a cat is loyal to a house.

The incorrect option is 1:
Option 1 incorrectly pairs Super profit with Cat nature goodwill, confusing a method of calculation (Super profit) with a type of goodwill (Cat nature goodwill). Furthermore, it incorrectly matches Normal profit with the formula for Super Profit (Actual Average profit - Normal profit), which would lead to a fundamental miscalculation of both values. While it correctly identifies the calculation for purchased goodwill (a)-(i), the subsequent mismatches render the entire option invalid.

The incorrect option is 2:
This option makes a significant error by matching Goodwill with the formula for Normal Profit (a)-(ii), failing to use the correct formula for purchased goodwill, which is the excess consideration paid over net assets. It also incorrectly states that Normal Profit is calculated by (c)-(i) Purchases consideration - Net assets, which is the formula for calculating *purchased goodwill*, not the expected profit from capital employed. Although it correctly identifies the calculation for Super profit, the errors in the basic accounting concepts for (a) and (c) make this choice wrong.

The incorrect option is 4:
Option 4 incorrectly matches the general concept of Goodwill with a specific *type* of goodwill (a)-(iii) Cat nature goodwill. It also swaps the application of the formulas for purchased goodwill. By linking the *type* of goodwill, Institutional goodwill (d), with the *calculation* for purchased goodwill (i), it demonstrates a confusion between the nature/classification of goodwill and its accounting valuation methods. While the calculations for Super profit and Normal profit are correct in this option, the initial errors related to (a) and (d) invalidate the overall matching.