Under the capitalization method, if the normal rate of return increases while all other things remain the same, what happens to goodwill?

Correct answer: Goodwill may decrease

Under the capitalization method, the capitalized value of maintainable profits is calculated as: Average profit × 100 ÷ Normal rate of return. If average profit and actual capital employed remain unchanged, an increase in the normal rate makes the denominator larger, so the capitalized value falls. Goodwill under the capitalization-of-average-profit approach is generally the capitalized value minus actual capital employed; therefore goodwill will decrease, or may become lower, when the rate rises. Option A is correct. It is not necessarily unchanged, it does not always increase, and a higher rate does not convert goodwill into a liability. The exact fall depends on the figures.