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All questions of Unit 2: Treatment of Goodwill in Partnership Accounts for CA Foundation Exam

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The capital of A and B sharing profits and losses equally are Rs. 90,000 and Rs. 30,000 respectively. They value the goodwill of the firm at Rs. 84,000, which was not recorded in the books. If goodwill is be raised now, by what amount each partner’s capital account will be debited:
  • a)
    Rs. 21,000 and Rs. 63,000.
  • b)
    Rs. 42,000 and Rs. 42,000.
  • c)
    Rs. 63,000 and Rs. 21,000.
  • d)
    None of the above
Correct answer is option 'D'. Can you explain this answer?

Sounak Jain answered
Given:
Capital of A = Rs. 90,000
Capital of B = Rs. 30,000
Goodwill = Rs. 84,000

To find: The amount by which each partner's capital account will be debited if goodwill is to be raised now.

Solution:
When goodwill is to be raised, it means that its value should be recorded in the books of accounts. As the goodwill is not recorded in the books, it needs to be added to the capital accounts of the partners.

The new capital of A and B after adding goodwill will be:
Capital of A = Rs. 90,000 + Rs. 42,000 (half of goodwill) = Rs. 1,32,000
Capital of B = Rs. 30,000 + Rs. 42,000 (half of goodwill) = Rs. 72,000

The amount by which each partner's capital account will be debited will be the difference between the old capital and the new capital.

Debit to A's capital account = Rs. 1,32,000 - Rs. 90,000 = Rs. 42,000
Debit to B's capital account = Rs. 72,000 - Rs. 30,000 = Rs. 42,000

Therefore, the correct option is 'D'. None of the above, as the amount by which each partner's capital account will be debited is Rs. 42,000.

Ravi and Suraj are partners having the profit sharing ratio 3:2 in a firm. They admitted Tarun in partnership and new profit sharing ratio of Ravi, Suraj and Tarun was decided at 2:2:1 respectively. Tarun brings in Rs. 30,000 as goodwill. What would be the share of Ravi in goodwill?
  • a)
    Rs. 30,000
  • b)
    Rs. 18,000
  • c)
    Rs. 6,000
  • d)
    None of the above 
Correct answer is 'A'. Can you explain this answer?

Meera Joshi answered
Calculation of new profit sharing ratio:
- Ravi's share = 3/5
- Suraj's share = 2/5
- Tarun's share = 1/5
- Total = 3/5 + 2/5 + 1/5 = 1

Calculation of Tarun's share in goodwill:
- Tarun brings in Rs. 30,000 as goodwill
- Tarun's share in the profit sharing ratio = 1/5
- Tarun's share in goodwill = Rs. 30,000 x 1/5 = Rs. 6,000

Calculation of Ravi's share in goodwill:
- Ravi's share in the old profit sharing ratio = 3/5
- Ravi's share in the new profit sharing ratio = 2/5
- Change in Ravi's share = 2/5 - 3/5 = -1/5
- Ravi's share in goodwill = Rs. 6,000 x (-1/5) = -Rs. 1,200
- However, since goodwill is a positive asset, Ravi's share in goodwill cannot be negative
- Therefore, Ravi's share in goodwill = Rs. 30,000 + (-Rs. 1,200) = Rs. 28,800

Answer: Option (a) Rs. 30,000

​The profits of last five years are Rs. 85,000; Rs. 90,000; Rs. 70,000; Rs. 1,00,000 and Rs. 80,000. Find the value of goodwill, if it is calculated on average profits of last five years on the basis of 3 years of purchase.
  • a)
    Rs. 85,000.
  • b)
    Rs. 2,55,000.
  • c)
    Rs. 2,75,000.
  • d)
    Rs. 2,85,000.
Correct answer is option 'B'. Can you explain this answer?

Poonam Reddy answered
Calculation of goodwill : 
1. Average profit = Total profit/ No. of years
   Average profit =  Rs. (85000 + 90000 + 70000 + 100000 + 80000)/ 3
   Average profit =  Rs. 425000/ 5
   Average profit =  Rs. 85000
2. Goodwill = Average profit * No. of years purchase
    Goodwill = Rs. 85000 * 3
    Goodwill = Rs. 255000

A and B are partners with the capital Rs. 50,000 and Rs. 40,000 respectively. They share profits and losses equally. C is admitted on bringing Rs. 50,000 as capital only and nothing was bought against goodwill. Goodwill in Balance sheet of Rs. 20,000 is revalued as Rs. 35,000. What will be value of goodwill in the books after the admission of C?
  • a)
    Rs. 55,000.
  • b)
    Rs. 35,000.
  • c)
    Rs. 20,000.
  • d)
    Rs. 15,000
Correct answer is option 'B'. Can you explain this answer?

Snehal Das answered
Calculation of Goodwill:
- A's capital = Rs. 50,000
- B's capital = Rs. 40,000
- Total capital before admission of C = Rs. 90,000
- Goodwill in balance sheet = Rs. 20,000
- Goodwill revalued at Rs. 35,000
- Goodwill increase = Rs. 35,000 - Rs. 20,000 = Rs. 15,000

Effect of C's admission:
- C's capital = Rs. 50,000
- Total capital after C's admission = Rs. 1,40,000 (Rs. 90,000 + Rs. 50,000)
- A and B still have equal share in profits and losses
- C will also have equal share in profits and losses

Calculation of new Goodwill:
- Goodwill increase = Rs. 15,000
- Goodwill to be shared by 3 partners now
- New goodwill for each partner = Rs. 15,000 / 3 = Rs. 5,000
- Total goodwill in books after C's admission = Rs. 35,000 (Rs. 20,000 + Rs. 15,000)

Therefore, the correct answer is option B, Rs. 35,000.

The capital of B and D are Rs. 90,000 and Rs. 30,000 respectively with the profit sharing ratio 3:1. The new ratio, admissible after 01.04.2006 is 5:3. The Goodwill is valued Rs. 80,000 as on that date. Amount payable by a gaining partner to a scarifying partner is: 
  • a)
    B will pay to D Rs. 10,000
  • b)
    D will pay to B Rs. 10,000
  • c)
    B will pay to D Rs. 80,000
  • d)
    Will pay to B Rs. 80,000
Correct answer is option 'B'. Can you explain this answer?

Lekshmi Mehta answered
**Given Information:**

- Capital of partner B = Rs. 90,000
- Capital of partner D = Rs. 30,000
- Profit sharing ratio = 3:1
- New ratio admissible after 01.04.2006 = 5:3
- Goodwill value as on 01.04.2006 = Rs. 80,000

**Calculation of Gaining and Sacrificing Ratio:**

1. The existing profit sharing ratio is 3:1. Let's assume the gaining ratio is a and the sacrificing ratio is b.
- a + b = 4 (3+1)
- The gaining ratio will be (3/4) and the sacrificing ratio will be (1/4).

2. The new profit sharing ratio is 5:3. Let's assume the new gaining ratio is c and the new sacrificing ratio is d.
- c + d = 8 (5+3)
- The new gaining ratio will be (5/8) and the new sacrificing ratio will be (3/8).

**Calculation of Goodwill:**

1. The existing ratio is 3:1 and the new ratio is 5:3. Let's assume the value of the goodwill is x.
- (3/4) = (5/8) * x
- x = (3/4) * (8/5)
- x = 12/5

2. The value of the goodwill as on 01.04.2006 is given as Rs. 80,000.
- (12/5) * y = 80,000
- y = (80,000 * 5)/12
- y = 33,333.33

**Calculation of Amount Payable:**

1. The sacrificing partner is D. The amount payable by the gaining partner (B) to the sacrificing partner (D) can be calculated using the formula:
- Amount Payable = Sacrificing Ratio * Value of Goodwill
- Amount Payable = (3/8) * 33,333.33
- Amount Payable = Rs. 12,499.99

2. Since the amount payable is rounded off to the nearest whole number, the correct answer is option B: D will pay to B Rs. 10,000.

Therefore, option B is the correct answer.

A and B are partners with the capital Rs. 50,000 and 40,000 respectively. They share profits and losses equally. C is admitted on bringing Rs. 50,000 as capital only and nothing was bought against goodwill. Goodwill in Balance sheet of Rs. 20,000 is revalued as Rs. 35,000. What will be value of goodwill in the books after the admission of C?
  • a)
    Rs. 55,000
  • b)
    Rs. 35,000
  • c)
    Rs. 20,000
  • d)
    Rs. 15,000
Correct answer is option 'B'. Can you explain this answer?

Simran Pillai answered
Given: A's capital = Rs. 50,000, B's capital = Rs. 40,000, C's capital = Rs. 50,000
Goodwill in Balance sheet = Rs. 20,000
Goodwill revalued as Rs. 35,000

Step-by-step solution:
1. Total capital after C's admission = Rs. 1,40,000 (50,000+40,000+50,000)
2. Old ratio of A and B = 5:4
3. New ratio of A, B, and C = 5:4:5
4. Goodwill brought by C = 0 (as nothing was bought against goodwill)
5. Goodwill revalued at Rs. 35,000 will be divided among the partners in their new sharing ratio i.e., 5:4:5
6. Goodwill share of A = (5/14) * 35,000 = Rs. 12,500
7. Goodwill share of B = (4/14) * 35,000 = Rs. 10,000
8. Goodwill share of C = (5/14) * 35,000 = Rs. 12,500
9. Value of goodwill in the books after C's admission = Rs. 35,000 (as the revalued goodwill of Rs. 35,000 is divided among the partners in their new sharing ratio)

Hence, the correct answer is option B) Rs. 35,000.

Goodwill is to be calculated at 1.5 years of purchase of average profit of last 6 years. Profit earned during the first 3 years is Rs. 30,000, Rs. 20,000 and Rs. 20,000 and losses suffered of Rs. 5,000, Rs. 3,000 and Rs. 2000 in the last three years. Goodwill will be :
  • a)
    Rs. 10,000
  • b)
    Rs. 15,000
  • c)
    Rs. 20,000
  • d)
    Rs. 25,000
Correct answer is option 'B'. Can you explain this answer?

Harshad Kapoor answered
Calculation of Goodwill:

1. Average profit for the last 6 years:

The average profit for the last 6 years can be calculated as follows:

Total profit for the last 6 years = (30,000 + 20,000 + 20,000 - 5,000 - 3,000 - 2,000) = 60,000

Average profit for the last 6 years = Total profit for the last 6 years/6 = 60,000/6 = Rs. 10,000

2. Goodwill:

Goodwill is to be calculated at 1.5 years of purchase of average profit of last 6 years.

Goodwill = 1.5 x Average profit for the last 6 years = 1.5 x Rs. 10,000 = Rs. 15,000

Therefore, the correct answer is option B, which is Rs. 15,000.

Goodwill bought in by incoming partner in cash for joining in a partnership firm is taken away by the old partners in:
  • a)
    Old Profit Sharing Ratio.
  • b)
    New Profit Sharing Ratio.
  • c)
    Sacrificing Ratio.
  • d)
    Capital Ratio.
Correct answer is option 'C'. Can you explain this answer?

Meera Rane answered
Understanding Goodwill in Partnerships
When a new partner joins a partnership firm and brings in cash for goodwill, the distribution of this goodwill among existing partners is crucial. The correct answer to how goodwill is taken away by old partners is option 'C', which refers to the "Sacrificing Ratio."
What is Sacrificing Ratio?
- The sacrificing ratio is the ratio in which existing partners sacrifice their profit share to accommodate the new partner.
- This ratio is calculated based on the difference between the old profit-sharing ratio and the new profit-sharing ratio.
Why Sacrificing Ratio?
- Compensation for New Partner: When a new partner joins, they contribute cash as goodwill. The existing partners must share this goodwill based on how much profit they are willing to sacrifice.
- Equitable Distribution: The sacrificing ratio ensures that the goodwill is equitably distributed among the old partners according to the profits they are relinquishing.
Calculation of Sacrificing Ratio
1. Determine Old Profit Sharing Ratio: Identify how profits were shared among existing partners before the new partner joined.
2. Determine New Profit Sharing Ratio: Calculate how profits will be shared after the new partner joins the firm.
3. Calculate Sacrificing Ratio: Subtract the new profit-sharing ratio from the old profit-sharing ratio for each existing partner to find out how much each partner is sacrificing.
Conclusion
In summary, when a new partner buys in goodwill, the existing partners distribute this goodwill based on the sacrificing ratio. This method ensures that the interests of all partners are taken into account and that the transition is fair and equitable.

 The following particulars are available in respect of the business carried on by a partnership firm:
Trading Results:
2001 Loss Rs. 5,000
2002 Loss Rs. 10,000
2003 Profit Rs. 75,000
2004 Profit Rs. 60,000
You are required to compute the value of goodwill on the basis of 5 year’s purchase of average profit of the business.
  • a)
     Rs. 1,25,000
  • b)
    Rs. 1,50,000
  • c)
     Rs. 10,000
  • d)
    Rs. 1,20,000
Correct answer is option 'B'. Can you explain this answer?

Palak Choudhary answered
Average of profits, assuming that the normal rate of return on investment is 10%.

First, we need to calculate the total profits for the past 5 years:
Total profits = 0 + 0 + 75,000 + 60,000 = Rs. 1,35,000

Next, we need to calculate the average annual profit:
Average annual profit = Total profits / 5 = Rs. 27,000

We then need to calculate the capital required to generate this average annual profit:
Capital required = Average annual profit / Normal rate of return = Rs. 2,70,000

Assuming that the partners share the profits and losses equally, the share of each partner's capital in the partnership will be:
Partner's capital share = Capital required / 2 = Rs. 1,35,000

The value of goodwill will then be the excess of the total capital employed over the sum of the partners' capital shares:
Goodwill = Total capital employed - (Partner A's capital share + Partner B's capital share)
Assuming there are two partners in the firm, this will be:
Goodwill = Total capital employed - (Rs. 1,35,000 + Rs. 1,35,000) = Total capital employed - Rs. 2,70,000

We do not have information about the total capital employed, so we cannot calculate the value of goodwill.

The capital of B and D are Rs. 90,000 and Rs. 30,000 respectively with the profit sharing ratio 3:1. The new ratio, admissible after 01.04.2006 is 5:3. Goodwill valued on 02.04.2006 as Rs. 84,000 will be credited to B and D’s capital by Rs………. and Rs. …………
  • a)
    63,000 and 21,000.
  • b)
    50,000 and 34,000.
  • c)
    52,500 and 31,500.
  • d)
    60,000 and 24,000.
Correct answer is option 'D'. Can you explain this answer?

Simran Pillai answered
The total capital of B and D is Rs. 1,20,000 (90,000 + 30,000).
The profit sharing ratio is 3:1, which means B gets 3/4th and D gets 1/4th of the profit.
Let the new profit sharing ratio be 5x and 3x.
We can set up the following equation:
3/4 * profit = 5x/8 * profit + 3x/8 * profit + goodwill
Where profit is the total profit earned after 01.04.2006.
Simplifying the equation, we get:
3/4 * profit = (5x+3x)/8 * profit + 84,000
3/4 * profit = 8x/8 * profit + 84,000
3/4 * profit - 8x/8 * profit = 84,000
-5/8 * profit = 84,000
Profit = -1,34,400
This means there was a loss of Rs. 1,34,400 after 01.04.2006.
Now, we can calculate the new capitals of B and D using the new profit sharing ratio:
B's capital = (5/8) * (90,000) - 84,000 = 9,375
D's capital = (3/8) * (30,000) - 84,000 = -33,375
Since D's capital is negative, we can assume that B will absorb the loss. Therefore, B's new capital will be:
90,000 + 9,375 - 1,34,400 = -35,025
D's new capital will be 30,000 - 33,375 = -3,375
Thus, the new capital of B is Rs. -35,025 and the new capital of D is Rs. -3,375.

Under annuity basis goodwill is calculated by: 
  • a)
    No. of years purchased multiplied with average profits
  • b)
    No. of years Purchased multiplied with super profits
  • c)
    Summation of the discounted value of expected future benefits
  • d)
    Super profit divided with expected rate of return. 
Correct answer is option 'C'. Can you explain this answer?

Nandini Iyer answered
Under this method, goodwill is calculated by taking average super profit as the value of an annuity over a certain number of years. The present value of this annuity is computed by discounting at the given rate of interest (normal rate of return). This discounted present value of the annuity is the value of goodwill.

 The total capital of a partnership firm is Rs. 6,00,000 and annual average profits of the firm are Rs. 1,50,000. The normal rate of return in the business is considered at 20%. Find out the value of the goodwill at 3 years purchase of super profit. 
  • a)
    Rs. 60,000
  • b)
    Rs. 90,000
  • c)
    Rs. 75,000
  • d)
    Rs. 50,000
Correct answer is 'D'. Can you explain this answer?

Syed Abdul Majeed answered
First Add capital and annual average profit that is 6,00,000 + 1,50, 000 =7,50,000 now find out the return in business that is 20% of returns are there... 7,50,000*20/100=1,50,000 and now calculate your goodwill after three years 1,50,000/3=50,000 Answer is D

A & B are partners sharing profits and losses in the ratio 5:3. On admission C brings Rs. 70,000 cash and Rs. 48,000 against goodwill. New profit sharing ratio between A, B and C are 7:5:4. Find the sacrificing ratio as A:B
  • a)
    3:1.
  • b)
    4:7.
  • c)
    5:4.
  • d)
    2:1.
Correct answer is option 'A'. Can you explain this answer?

Pj Commerce Academy answered
Given:
- A and B are partners sharing profits and losses in the ratio 5:3.
- C brings Rs. 70,000 cash and Rs. 48,000 against goodwill.
- The new profit sharing ratio between A, B, and C is 7:5:4.
To find:
The sacrificing ratio as A:B.

1. The partnership ratio of A and B before C's admission is 5:3.
2. Let's calculate the initial capitals of A and B:
- Let the initial capital of A be 5x.
- Let the initial capital of B be 3x.
3. The total initial capital is 5x + 3x = 8x.
4. C brings Rs. 70,000 in cash, so the new capital of C is 70,000.
5. C also brings Rs. 48,000 against goodwill, which will be added to the total capital.
- So, the new total capital is 70,000 + 48,000 = 118,000.
6. The new profit sharing ratio is 7:5:4, which can be written as 7x:5x:4x.
7. The difference in the capitals of A and B is the sacrificing ratio.
- Sacrificing ratio = (Initial capital of A - New capital of A):(Initial capital of B - New capital of B)
- Sacrificing ratio = (5x - 7x):(3x - 5x)
- Sacrificing ratio = -2x : -2x
- Simplifying, we get the sacrificing ratio as 2:1.
Final Answer:
The sacrificing ratio as A:B is 2:1.

Extra amount over and above the saleable values of the identifiable assets that could be fetches by selling an existing firm as a going concern
  • a)
    Goodwill 
  • b)
    Revaluation Profit 
  • c)
    Super Profit 
  • d)
    Surplus
Correct answer is option 'A'. Can you explain this answer?

Anu Sen answered
Goodwill

Goodwill refers to the intangible asset that represents the reputation, customer base, brand value, and other non-physical attributes of a business. It is the extra amount over and above the saleable values of the identifiable assets that could be fetched by selling an existing firm as a going concern. Goodwill represents the value of the business as a whole, including its established relationships, customer loyalty, and market position.

Explanation:

When a business is sold as a going concern, the buyer pays a price that reflects not only the value of the tangible assets owned by the business but also the intangible value associated with the business. This intangible value is known as goodwill.

Goodwill arises when the buyer is willing to pay more for the business than the net value of its identifiable assets. It represents the reputation, customer base, brand value, and other non-physical attributes that contribute to the business's earning capacity.

The factors that contribute to the creation of goodwill include:
1. Reputation: A good reputation in the market can attract more customers and lead to increased sales and profitability.
2. Customer Base: A loyal customer base that generates recurring revenue is considered an asset.
3. Brand Value: A strong brand name can command premium pricing and customer loyalty.
4. Location: A prime location can contribute to the success and profitability of a business.
5. Intellectual Property: Ownership of patents, copyrights, or trademarks can enhance the value of a business.

When a business is sold, the price paid by the buyer is typically higher than the net value of the identifiable assets. The difference between the sale price and the net value of the assets is recorded as goodwill on the buyer's balance sheet. Goodwill is considered an intangible asset and is subject to periodic impairment testing to ensure its value is not overstated.

Goodwill has a significant impact on a company's financial statements. It is amortized over its useful life or tested for impairment annually. Goodwill is not considered a physical asset but represents the intangible value that can contribute to a business's profitability and success.

The capital of B and D are Rs. 90,000 and Rs. 30,000 respectively with the profit sharing ratio 3:1. The new ratio, admissible after 01.04.2006 is 5:3. The goodwill is valued Rs. 80,000 as on that date. Amount payable by a gaining partner to a scarifying partner is:
  • a)
    B will pay to D Rs. 10,000.
  • b)
    D will pay to B Rs. 10,000.
  • c)
    B will pay to D Rs. 80,000.
  • d)
    will pay to B Rs. 80,000.
Correct answer is option 'B'. Can you explain this answer?

Malavika Shah answered
Calculation of amount payable by a gaining partner to a sacrificing partner:
Given information:
- Initial capital of B = Rs. 90,000
- Initial capital of D = Rs. 30,000
- Profit sharing ratio initially = 3:1
- New profit sharing ratio = 5:3
- Goodwill value as on 01.04.2006 = Rs. 80,000

Step 1: Calculation of Gaining Partner's Capital:
- B's initial capital = Rs. 90,000
- D's initial capital = Rs. 30,000
- Total initial capital = Rs. 120,000
- New profit sharing ratio for B = 5/(5+3) = 5/8
- New profit sharing ratio for D = 3/(5+3) = 3/8
- B's share of goodwill = Rs. 80,000 * 5/8 = Rs. 50,000
- D's share of goodwill = Rs. 80,000 * 3/8 = Rs. 30,000
- B's total capital after considering goodwill = Rs. 90,000 + Rs. 50,000 = Rs. 140,000
- D's total capital after considering goodwill = Rs. 30,000 + Rs. 30,000 = Rs. 60,000

Step 2: Calculation of Sacrificing Partner's Capital:
- Sacrificing partner = D
- D's total capital after considering goodwill = Rs. 60,000
- D's share of goodwill = Rs. 30,000
- Amount payable by gaining partner (B) to sacrificing partner (D) = D's total capital after considering goodwill - D's share of goodwill
- Amount payable by B to D = Rs. 60,000 - Rs. 30,000 = Rs. 30,000
Therefore, option B is correct: D will pay to B Rs. 30,000.

What do you mean by Super profit ?
  • a)
    Total profit/ number of years 
  • b)
    Weighted profit/ number of years 
  • c)
    Average profit- Normal profit 
  • d)
    None
Correct answer is option 'C'. Can you explain this answer?

Jyoti Nair answered
Super profit is a term used in accounting and finance to describe the excess profit earned by a company over and above the normal profit. It is also known as abnormal profit or economic profit.

Calculating Super Profit

There are different methods of calculating super profit, but the most commonly used one is:

Super profit = Average profit - Normal profit

Where:

- Average profit is the profit earned by a company over a period of time, typically three to five years.
- Normal profit is the minimum profit required to cover the cost of capital, including the cost of debt and equity.

The concept of normal profit is important because it represents the opportunity cost of using the company's resources. If the company earns less than the normal profit, it is better off investing its capital elsewhere. If it earns more than the normal profit, it is generating a return on investment that exceeds the cost of capital.

Using the super profit formula, we can determine how much of the company's profit is due to its ability to generate returns above the cost of capital, and how much is due to other factors such as luck, timing, or market conditions.

Significance of Super Profit

Super profit is an important metric for investors and analysts because it reflects the company's competitive advantage and its ability to generate sustainable profits over the long term. A company that consistently earns super profits is more likely to have a moat or a competitive advantage that protects its market share and pricing power.

Super profit is also used to estimate the value of a company in a discounted cash flow (DCF) analysis. By estimating the company's future super profits, analysts can calculate its intrinsic value and compare it to the market price.

Conclusion

Super profit is a useful concept for understanding a company's profitability and competitive advantage. By calculating the excess profit earned over and above the normal profit, investors and analysts can evaluate the company's ability to generate sustainable returns on investment.

The profits for 1998-99 are Rs. 2,000; for 1999-2000 is Rs. 26,100 and for 2000-01 is Rs. 31,200. Closing stock for 1999-2000 and 2000-01 includes the defective items of Rs. 2,200 and Rs. 6,200 respectively which were considered as having market value NIL. Calculate goodwill on average profit method.
  • a)
    Rs. 23,700.
  • b)
    Rs. 17,700.
  • c)
    Rs. 13,700.
  • d)
    Rs. 17,300.
Correct answer is option 'B'. Can you explain this answer?

Lakshmi Kaur answered
Given:
Profit in 1998-99 = Rs. 2,000
Profit in 1999-2000 = Rs. 26,100 (including defective stock of Rs. 2,200)
Profit in 2000-01 = Rs. 31,200 (including defective stock of Rs. 6,200)

To find: Goodwill on the average profit method

Solution:
Step 1: Calculate the total profits for the three years
Total profits = 2,000 + 26,100 + 31,200 = Rs. 59,300

Step 2: Calculate the average profit
Average profit = Total profits / Number of years
Average profit = 59,300 / 3 = Rs. 19,766.67

Step 3: Adjust the profits for the defective stock
Adjusted profit for 1999-2000 = 26,100 - 2,200 = Rs. 23,900
Adjusted profit for 2000-01 = 31,200 - 6,200 = Rs. 25,000

Step 4: Calculate the total adjusted profits
Total adjusted profits = 2,000 + 23,900 + 25,000 = Rs. 50,900

Step 5: Calculate the value of goodwill
Goodwill = Average profit x Number of years - Total adjusted profits
Goodwill = 19,766.67 x 3 - 50,900
Goodwill = Rs. 17,700

Therefore, the value of goodwill on the average profit method is Rs. 17,700 (option B).

Following are the factors affecting goodwill except:
  • a)
    Nature of business.
  • b)
    Efficiency of management.
  • c)
    Technical know how.
  • d)
    Location of the customers.
Correct answer is option 'D'. Can you explain this answer?

Nipun Tuteja answered
Factors Affecting Goodwill:
1. Nature of Business:
- The type of business a company operates in can significantly impact its goodwill.
- Certain industries or sectors may be more prone to generating goodwill due to their reputation or brand image.
- For example, a company in the luxury fashion industry may have a higher level of goodwill compared to a company in the commodity manufacturing industry.
2. Efficiency of Management:
- The competence and effectiveness of a company's management team can influence its goodwill.
- Good management practices such as strategic decision-making, effective communication, and strong leadership can enhance a company's reputation and goodwill.
- On the other hand, poor management practices can damage a company's reputation and erode its goodwill.
3. Technical Know-How:
- Companies that possess unique technical expertise or intellectual property may have a higher level of goodwill.
- Technical know-how can give a company a competitive advantage and contribute to its reputation and customer loyalty.
- For example, a pharmaceutical company that holds patents for innovative drugs may have a strong goodwill in the market.
4. Location of Customers (Excluding Answer D):
- The geographic location of a company's customer base can influence its goodwill to some extent.
- Being located in close proximity to customers can enhance customer relationships and facilitate better service delivery.
- However, it is important to note that location is not the primary factor affecting goodwill, as businesses can establish goodwill regardless of their physical location.
In conclusion, the factors affecting goodwill include the nature of business, efficiency of management, and technical know-how. The location of customers, while it may have some influence, is not a significant factor in determining goodwill.

The capital of A and B sharing profits and losses equally are Rs. 90,000 and Rs. 30,000 respectively. They value the goodwill of the firm at Rs. 84,000, which was not recorded in the books. If goodwill is be raised now, by what amount each partner’s capital account will be debited: 
  • a)
    Rs. 21,000 and Rs. 63,000
  • b)
    Rs. 42,000 and Rs. 42,000
  • c)
    Rs. 63,000 and Rs. 21,000
  • d)
    None of the above
Correct answer is option 'D'. Can you explain this answer?

Snehal Das answered
Will be credited or debited?

Since A and B share profits and losses equally, they have a 1:1 ratio in their capital contributions. Therefore, the total capital of the firm is Rs. 1,20,000 (Rs. 90,000 + Rs. 30,000).

If the goodwill of the firm is valued at Rs. 84,000, it means that the total value of the firm is Rs. 2,04,000 (Rs. 1,20,000 + Rs. 84,000).

To raise the goodwill in the books, each partner's capital account will be credited or debited based on their share in the firm. Since they have an equal share, each partner's capital account will be credited or debited by half of the goodwill value.

Therefore, each partner's capital account will be credited by Rs. 42,000 (half of Rs. 84,000). The new capital balance of A and B will be Rs. 1,32,000 each (Rs. 90,000 + Rs. 42,000 and Rs. 30,000 + Rs. 42,000 respectively).

Profits of last three years were Rs. 6,000, Rs. 13,000 and Rs. 8,000. Calculate goodwill for two years of purchase
  • a)
    Rs. 81,000
  • b)
    Rs. 27,000
  • c)
    Rs. 9,000
  • d)
    Rs. 18,000
Correct answer is option 'D'. Can you explain this answer?

Sonal Patel answered
Calculation of Goodwill for Two Years of Purchase:

Step 1: Calculate the Average Profit for the last three years
Average Profit = (6000 + 13000 + 8000) / 3
Average Profit = 9000

Step 2: Calculate the Super Profit for the two years of purchase
Super Profit = Average Profit - Normal Profit
Normal Profit = Profit of the year of purchase
Super Profit = 9000 - 8000
Super Profit = 1000

Step 3: Calculate Goodwill using the Super Profit Method
Goodwill = Super Profit x Number of Years of Purchase
Goodwill = 1000 x 2
Goodwill = 2000

Therefore, the Goodwill for two years of purchase is Rs. 18,000.

A and B are equal partners. They admit C as a partner with 1/7th share. What is the new profit sharing ratio of A and B?
  • a)
    6/7 : 1/7
  • b)
    3/7 : 3/7
  • c)
    4/7 : 2/7
  • d)
    2/7 : 4/7
Correct answer is option 'B'. Can you explain this answer?

Arnab Nambiar answered
Given:
- A and B are equal partners.
- C is admitted as a partner with a 1/7th share.

To find:
- The new profit sharing ratio of A and B.

Solution:
Step 1: Determine the total number of shares.
Since A and B are equal partners, they each have an equal share. Let's assume their share to be x.
So, A's share = x and B's share = x.
C is admitted with a 1/7th share, so C's share = (1/7)x.

The total number of shares is the sum of the individual shares:
Total shares = A's share + B's share + C's share
Total shares = x + x + (1/7)x
Total shares = (2 + 1/7)x
Total shares = (15/7)x

Step 2: Determine the new profit sharing ratio.
The new profit sharing ratio is determined by dividing each partner's share by the total shares.

A's new profit sharing ratio = A's share / Total shares
A's new profit sharing ratio = (x) / ((15/7)x)
A's new profit sharing ratio = 1 / (15/7)
A's new profit sharing ratio = 7/15

B's new profit sharing ratio = B's share / Total shares
B's new profit sharing ratio = (x) / ((15/7)x)
B's new profit sharing ratio = 1 / (15/7)
B's new profit sharing ratio = 7/15

Therefore, the new profit sharing ratio of A and B is 7/15 : 7/15, which can be simplified to 1/3 : 1/3.

Step 3: Simplify the ratio.
The new profit sharing ratio can be simplified by dividing both sides by the common factor of 1/3.
1/3 : 1/3 = (1/3)/(1/3) : (1/3)/(1/3)
1/3 : 1/3 = 1 : 1

Hence, the new profit sharing ratio of A and B is 1 : 1, which is equivalent to 3/7 : 3/7. Therefore, the correct answer is option 'B'.

Sacrificing ratio is used to distribute _________ on admission of a new partner:
  • a)
    Goodwill 
  • b)
    Reserves
  • c)
    Profits on revaluation 
  • d)
    Unrecorded assets
Correct answer is option 'A'. Can you explain this answer?

Alok Mehta answered
The following are the different situations when sacrificing ratio is used.

1. When the existing partners of a partnership firm agree to change the share of profit among themselves.

2. When a new partner is admitted in the partnership firm and the amount of the goodwill brought by him/her is transferred among the old partners in sacrificing ratio of the old partners.

Hence the Correct Answer is Option A 

Capital employed in a business is Rs. 1,50,000. Profits are Rs. 50,000 and the normal rate of profit is 20%. The amount of goodwill as per capitalization method will be:
  • a)
    Rs. 2,00,000
  • b)
    Rs. 1,50,000
  • c)
    Rs. 3,00,000
  • d)
    Rs. 1,00,000
Correct answer is option 'D'. Can you explain this answer?

Pragati Shah answered
Explanation:

To calculate the amount of goodwill as per the capitalization method, we need to use the formula:

Goodwill = (Super Profits / Normal Rate of Return) * 100

Let's break down the given information step by step:

1. Capital Employed: Rs. 1,50,000
- This refers to the total amount of capital invested in the business.

2. Profits: Rs. 50,000
- This is the profit earned by the business.

3. Normal Rate of Profit: 20%
- This is the expected rate of return on the capital employed. In this case, it is 20%.

4. Super Profits:
- Super Profits refer to the excess profit earned by the business over the normal rate of profit.
- Super Profits = Actual Profits - (Capital Employed * Normal Rate of Profit)
- Super Profits = Rs. 50,000 - (Rs. 1,50,000 * 20%)
- Super Profits = Rs. 50,000 - Rs. 30,000
- Super Profits = Rs. 20,000

5. Goodwill:
- Goodwill = (Super Profits / Normal Rate of Return) * 100
- Goodwill = (Rs. 20,000 / 20%) * 100
- Goodwill = Rs. 1,00,000

Therefore, the amount of goodwill as per the capitalization method is Rs. 1,00,000. Hence, option 'D' is the correct answer.

The capital of B and D are Rs. 90,000 and Rs. 30,000 respectively with the profit sharing ratio 3:1. The new ratio, admissible after 01.04.2006 is 5:3. Goodwill valued on 02.04.2006 as Rs. 84.000 will be credited to B and D’s capital by Rs……….and Rs…………..
  • a)
    Rs. 63,000 and Rs. 21,000
  • b)
    Rs. 50,000 and Rs. 24,000
  • c)
    Rs. 52,500 and Rs. 31,500
  • d)
    Rs. 60,000 and Rs. 24,000
Correct answer is option 'C'. Can you explain this answer?

Aarya Sharma answered
Explanation:

Step 1: Calculate the old profit sharing ratio
B's capital = Rs. 90,000
D's capital = Rs. 30,000
Total capital = Rs. 1,20,000

B's share = 3/4
D's share = 1/4

Step 2: Calculate the new profit sharing ratio
New ratio = 5:3

B's share = 5/8
D's share = 3/8

Step 3: Calculate the gain or loss due to change in profit sharing ratio
B's gain = (5/8 - 3/4) * 1,20,000 = Rs. 15,000
D's loss = (3/8 - 1/4) * 1,20,000 = Rs. 5,000

Step 4: Calculate the new capitals after adjustment
B's new capital = Rs. 1,05,000 (Rs. 90,000 + Rs. 15,000)
D's new capital = Rs. 25,000 (Rs. 30,000 - Rs. 5,000)

Step 5: Calculate the value of goodwill
Goodwill = Rs. 84,000

Step 6: Allocate the goodwill to B and D in their new profit sharing ratio
B's share = 5/8
D's share = 3/8

B's share of goodwill = (5/8) * Rs. 84,000 = Rs. 52,500
D's share of goodwill = (3/8) * Rs. 84,000 = Rs. 31,500

Step 7: Record the journal entry for the allocation of goodwill
B's capital account Dr. Rs. 52,500
D's capital account Dr. Rs. 31,500
To Goodwill account Cr. Rs. 84,000

Note: This is a simplified example and in practice, there may be additional adjustments and entries required. It is recommended to consult a professional accountant for accurate and comprehensive accounting treatment.

The definition ‘Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking.’ 
  • a)
    Ango-American Council on Productivity 
  • b)
    AICPA
  • c)
    Robert N. Anthony
  • d)
    All of the above
Correct answer is option 'A'. Can you explain this answer?

Maheshwar Datta answered
Of "definition" is a statement or description that explains the meaning of a word or phrase. It is an explanation of the essential nature or characteristics of something. A definition can be found in a dictionary or created by an individual to clarify the meaning of a term.

The profits and losses for the last years are 2001-02 Losses Rs. 10,000; 2002-03 Losses Rs. 2,500; 2003-04 Profits Rs. 98,000 & 2004-05 Profits Rs. 76,000. The average capital employed in the business is Rs. 2,00,000. The rate of interest expected from capital invested is 12%. The remuneration of partners is estimated to be Rs. 1,000 per month.Calculate the value of goodwill on the basis of two years purchase of super profits based on the average of four years.
  • a)
    Rs. 9,000.
  • b)
    Rs. 8,750.
  • c)
    Rs. 8,500.
  • d)
    Rs. 8,250.
Correct answer is option 'B'. Can you explain this answer?

Ritika Iyer answered
Calculation of Average Super Profit:
- Super Profit is the excess of actual profits over normal profits.
- Normal profits are estimated on the basis of a reasonable return on capital employed.
- Here, the rate of interest expected from capital invested is 12%.
- Hence, normal profit = 12% of average capital employed = 12% of Rs. 2,00,000 = Rs. 24,000.
- Super profits for the last four years are:
- 2001-02: Rs. (10,000 - 24,000) = Rs. -14,000 (loss)
- 2002-03: Rs. (2,500 - 24,000) = Rs. -21,500 (loss)
- 2003-04: Rs. (98,000 - 24,000) = Rs. 74,000 (profit)
- 2004-05: Rs. (76,000 - 24,000) = Rs. 52,000 (profit)
- Total Super Profit for 4 years = Rs. 1,00,500
- Average Super Profit for 4 years = Rs. 25,125 (1,00,500/4)

Calculation of Goodwill:
- Goodwill = Average Super Profit x Number of Years Purchase
- Number of Years Purchase = 2
- Hence, Goodwill = Rs. 25,125 x 2 = Rs. 50,250
- But, this is the value of goodwill for 4 years.
- To get the value of goodwill on the basis of two years purchase of super profits based on the average of four years, we need to calculate the average of the last two years.
- Average Super Profit for the last two years = (74,000 + 52,000)/2 = Rs. 63,000
- Goodwill = Average Super Profit x Number of Years Purchase = Rs. 63,000 x 2 = Rs. 1,26,000
- Partners' remuneration of Rs. 1,000 per month is not relevant for calculating goodwill.

Hence, the value of goodwill on the basis of two years purchase of super profits based on the average of four years is Rs. 8,750 (Option B).

The following particulars are available in respect of the business carried on by a partnership firm:
Trading Results:
         2001 Loss Rs. 5,000
        2002 Loss Rs. 10,000
        2003 Profit Rs. 75,000
        2004 Profit Rs. 60,000
You are required to compute the value of goodwill on the basis of 5 year’s purchase of average profit of the business.
  • a)
    Rs. 1,25,000.
  • b)
    Rs.1,50,000.
  • c)
    Rs. 10,000.
  • d)
    Rs. 1,20,000.
Correct answer is option 'B'. Can you explain this answer?

Harshad Nair answered
Calculation of Goodwill:

To calculate the value of goodwill, we need to find the average profit of the business for the given period and then multiply it by the desired number of years of purchase.

Step 1: Find Average Profit:

Average profit is calculated by taking the average of the profits earned during the profitable years.

Average Profit = (Profit 1 + Profit 2 + ... + Profit n) / n

Where n is the number of profitable years.

In this case, there are two profitable years (2003 and 2004) with profits of Rs. 75,000 and Rs. 60,000 respectively.

Average Profit = (75,000 + 60,000) / 2
= 1,35,000 / 2
= Rs. 67,500

Step 2: Calculate Goodwill:

Goodwill is calculated by multiplying the average profit by the desired number of years of purchase.

In this case, the desired number of years of purchase is 5.

Goodwill = Average Profit * Number of Years of Purchase
= 67,500 * 5
= Rs. 3,37,500

Conclusion:

Therefore, the value of goodwill on the basis of 5 years purchase of average profit of the business is Rs. 3,37,500.

Since the given options do not match with the calculated value, it seems there may be an error in the options provided. The correct answer cannot be determined based on the given options.

​Goodwill brought in by incoming partner in cash for joining in a partnership firm is taken away by the old partners in their ……… ratio.
  • a)
    Capital.
  • b)
    New Profit Sharing.
  • c)
    Sacrificing.
  • d)
    Old Profit Sharing.
Correct answer is option 'C'. Can you explain this answer?

Snehal Das answered
Explanation:

When a new partner joins a partnership, the value of the firm may increase due to the new partner's skills, experience, and resources. This increase in value is known as goodwill. The incoming partner may bring in cash as their contribution towards goodwill.

However, the treatment of this goodwill brought in by the incoming partner depends on the agreement made between the partners. In the absence of any agreement, the goodwill is taken away by the old partners in their sacrificing ratio.

Sacrificing Ratio:

The sacrificing ratio is the ratio in which the old partners agree to reduce their share of profits to accommodate the incoming partner. It is calculated by subtracting the new profit sharing ratio from the old profit sharing ratio.

For example, if the old partners had a profit sharing ratio of 2:1 and the new partner is admitted with a profit sharing ratio of 1:1, the sacrificing ratio would be 2-1:1-1 or 1:0. This means that the old partners will sacrifice one-third of their share of profits to accommodate the new partner.

Goodwill Treatment:

Once the sacrificing ratio is determined, the goodwill brought in by the incoming partner is taken away by the old partners in their sacrificing ratio. This means that the old partners will share the amount of goodwill brought in by the incoming partner in their sacrificing ratio.

For example, if the incoming partner brings in Rs. 1,00,000 as goodwill and the sacrificing ratio is 1:0, the old partners will share the goodwill in the ratio of 1:1. This means that each of the old partners will receive Rs. 50,000 from the goodwill brought in by the incoming partner.

X, Y and Z are partners sharing profits and losses in the ratio 5:3:2 decide to share the future profits in the ratio 2:3:5. What will be the treatment for workmen compensation fund appearing in the balance sheet on the date if no information is available for the same?
  • a)
    Distributed to the partners in old profit sharing ratio
  • b)
    Distributed to the partners in new profit sharing ratio
  • c)
    Distributed to the partners in capital ratio
  • d)
    Carried forward to new balance sheet without any adjustment
Correct answer is option 'A'. Can you explain this answer?

Aditya Das answered
Treatment for workmen compensation fund in the given scenario:

Distribution to the partners in old profit sharing ratio.

Explanation:

When there is no information available regarding the treatment of workmen compensation fund, it is assumed that the fund is a liability and needs to be settled. As per the partnership agreement, the profits and losses are shared in the ratio of 5:3:2. Therefore, the workmen compensation fund liability should also be distributed among the partners in the same ratio. Hence, the correct option is A, i.e., distributed to the partners in old profit sharing ratio.

This means that the workmen compensation fund liability will be distributed among the partners in the ratio of 5:3:2 as per the old profit sharing ratio and will be adjusted against their respective capital accounts. The remaining balance, if any, will be transferred to the current account of the partners.

It is important to note that the distribution of the workmen compensation fund liability should be done before the distribution of profits in the new ratio of 2:3:5. This is because the workmen compensation fund liability is a prior charge on profits and needs to be settled before any profits are distributed among the partners.

In conclusion, the workmen compensation fund liability will be distributed to the partners in the old profit sharing ratio and will be adjusted against their respective capital accounts.

X, Y and Z are partners sharing profits and losses in the ratio 5:3:2 decide to share the future profits in the ratio 2:3:5. What will be the treatment for workmen compensation fund appearing in the balance sheet on the date if no information is available for the same?
  • a)
    Distributed to the partners in old profit sharing ratio.
  • b)
    Distributed to the partners in new profit sharing ratio.
  • c)
    Distributed to the partners in capital ratio.
  • d)
    Carried forward to new balance sheet without any adjustment.
Correct answer is option 'A'. Can you explain this answer?

KP Classes answered
Explanation:
Background:
- X, Y, and Z are partners sharing profits and losses in the ratio 5:3:2.
- They have decided to share future profits in the ratio 2:3:5.
Workmen Compensation Fund:
- Workmen Compensation Fund is a provision made by a business for the welfare and benefits of its employees in case of any work-related injury or accident.
- It is usually shown as a liability in the balance sheet.
Treatment for Workmen Compensation Fund:
- In the absence of any specific information, the treatment for the Workmen Compensation Fund appearing in the balance sheet on the date will be as follows:
1. Distributed to the partners in old profit sharing ratio:
- The Workmen Compensation Fund can be distributed among the partners in the old profit sharing ratio of 5:3:2.
- This means that the amount will be divided among the partners based on their respective profit sharing ratios before the change in profit sharing ratio.
2. Reasoning behind this treatment:
- Since no information is available about the treatment of the Workmen Compensation Fund in the new profit sharing ratio, it is logical to distribute it in the old profit sharing ratio.
- This ensures that the partners receive their respective shares based on their previous profit sharing ratios.
Therefore, the correct answer is A: Distributed to the partners in old profit sharing ratio.

Which of the following statement in false?
  • a)
    Partnership deed in the mutual agreement between partners. 
  • b)
    The liability of all the partners is jointly and severally unlimited 
  • c)
    In the absence of partnership agreement, partners share profits in capital ratio. 
  • d)
    Profit and loss appropriation account is prepared to show the distribution of profits among partners. 
Correct answer is option 'C'. Can you explain this answer?

Aarya Sharma answered
False Statement in Partnership:

Partnership is a type of business organization in which two or more persons come together to carry on a business for profit. The partnership is governed by the Indian Partnership Act, 1932. The partnership deed is a legal document that governs the rights and obligations of partners and lays down the terms and conditions of the partnership. In this question, we are asked to identify the false statement regarding the partnership.

False Statement: In the absence of the partnership agreement, partners share profits in the capital ratio.

Explanation:

• Partnership Deed: It is a legal document that contains all the terms and conditions of the partnership, such as the name of the firm, the nature of the business, the capital contribution of each partner, the rights and duties of partners, profit-sharing ratio, etc. It is prepared and signed by all the partners.

• Jointly and Severally Unlimited Liability: In a partnership, the liability of partners is jointly and severally unlimited, which means that each partner is liable for the debts and obligations of the firm to the full extent of his personal assets.

• Profit and Loss Appropriation Account: It is prepared to show the distribution of profits among partners. It contains all the items of income and expenditure of the firm, such as sales, purchases, expenses, etc. It also shows the interest on capital, salary, commission, and share of profit of each partner.

• Profit-Sharing Ratio: It is the ratio in which partners share the profits and losses of the firm. The profit-sharing ratio may be equal or unequal, depending upon the terms of the partnership deed.

In the absence of the partnership agreement, partners share profits and losses equally, and the capital ratio is not considered. However, this statement is false because in the absence of the partnership agreement, the partnership is governed by the Indian Partnership Act, 1932, which provides that the profits and losses of the firm shall be shared equally among partners, irrespective of their capital contribution. Therefore, option C is the false statement.

 Following are the factors affecting goodwill except: 
  • a)
    Nature of business
  • b)
    Efficiency of management
  • c)
    Technical know how
  • d)
    Location of the customers
Correct answer is option 'D'. Can you explain this answer?

Nandini Iyer answered
Locational Factor: If the firm is centrally located or located in a very prominent place, it can attract, more customers resulting in an increase in turnover. Therefore, locational factor should always be considered while ascertaining the value of goodwill.

Chapter doubts & questions for Unit 2: Treatment of Goodwill in Partnership Accounts - Accounting for CA Foundation 2025 is part of CA Foundation exam preparation. The chapters have been prepared according to the CA Foundation exam syllabus. The Chapter doubts & questions, notes, tests & MCQs are made for CA Foundation 2025 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests here.

Chapter doubts & questions of Unit 2: Treatment of Goodwill in Partnership Accounts - Accounting for CA Foundation in English & Hindi are available as part of CA Foundation exam. Download more important topics, notes, lectures and mock test series for CA Foundation Exam by signing up for free.

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