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CA Foundation Exam  >  CA Foundation Tests  >  Principles and Practice of Accounting  >  Test: Treatment Of Goodwill In Partnership Accounts - 3 - CA Foundation MCQ

Test: Treatment Of Goodwill In Partnership Accounts - 3 - CA Foundation MCQ


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28 Questions MCQ Test Principles and Practice of Accounting - Test: Treatment Of Goodwill In Partnership Accounts - 3

Test: Treatment Of Goodwill In Partnership Accounts - 3 for CA Foundation 2024 is part of Principles and Practice of Accounting preparation. The Test: Treatment Of Goodwill In Partnership Accounts - 3 questions and answers have been prepared according to the CA Foundation exam syllabus.The Test: Treatment Of Goodwill In Partnership Accounts - 3 MCQs are made for CA Foundation 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Treatment Of Goodwill In Partnership Accounts - 3 below.
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Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 1
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​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.

Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 1

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

Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 2
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The profits of last three years are Rs. 42,000; Rs. 39,000 and Rs. 45,000. Find out the goodwill of two years purchase.

Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 2
Calculation of Goodwill:
To calculate the goodwill of two years purchase, we need to consider the average profit of the last three years.
Step 1: Calculate the average profit:
Average Profit = (Profit of Year 1 + Profit of Year 2 + Profit of Year 3) / 3
= (42,000 + 39,000 + 45,000) / 3
= 126,000 / 3
= 42,000
Step 2: Calculate the Goodwill:
Goodwill = Average Profit * Number of Years
= 42,000 * 2
= 84,000
Therefore, the goodwill of two years purchase is Rs. 84,000.
Conclusion:
The correct answer is option B: Rs. 84,000.
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Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 3
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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:

Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 3

Given:
Capital of A = Rs. 90,000
Capital of B = Rs. 30,000
Goodwill value = Rs. 84,000
To find:
Amount each partner's capital account will be debited when goodwill is raised.
Explanation:
When the goodwill is raised, it needs to be distributed among the partners in the ratio of their capitals. In this case, the ratio of capitals is 3:1 (A:B), so the distribution of goodwill will also be in the same ratio.
To calculate the amount each partner's capital account will be debited, we can use the following formula:
Amount to be debited = (Goodwill value / Total capital) * Partner's capital
Let's calculate the amount for each partner:
For partner A:
Amount to be debited = (84,000 / (90,000 + 30,000)) * 90,000
= (84,000 / 120,000) * 90,000
= (0.7) * 90,000
= 63,000
For partner B:
Amount to be debited = (84,000 / (90,000 + 30,000)) * 30,000
= (84,000 / 120,000) * 30,000
= (0.7) * 30,000
= 21,000
Hence, each partner's capital account will be debited by Rs. 63,000 (for partner A) and Rs. 21,000 (for partner B).
Therefore, the correct answer is option C: Rs. 63,000 and Rs. 21,000.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 4
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​Find the goodwill of the firm using capitalization method from the following information: Total Capital Employed in the firm Rs. 8,00,000 Reasonable Rate of Return 15% Profits for the year Rs. 12,00,000
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 4

To find the goodwill of the firm using the capitalization method, we can follow these steps:
1. Calculate the reasonable rate of return:
- Reasonable Rate of Return = Total Capital Employed * Rate of Return
- Reasonable Rate of Return = Rs. 8,00,000 * 15% = Rs. 1,20,000
2. Calculate the super profit:
- Super Profit = Profit for the year - Reasonable Rate of Return
- Super Profit = Rs. 12,00,000 - Rs. 1,20,000 = Rs. 10,80,000
3. Determine the value of goodwill:
- Goodwill = Super Profit * 100 / Rate of Return
- Goodwill = Rs. 10,80,000 * 100 / 15% = Rs. 72,00,000
Therefore, the goodwill of the firm using the capitalization method is Rs. 72,00,000.
The correct answer is option C: Rs. 72,00,000.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 5
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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. …………
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 5

Given Information:
- Capital of B = Rs. 90,000
- Capital of D = Rs. 30,000
- Profit sharing ratio = 3:1
- New ratio = 5:3
- Goodwill value on 02.04.2006 = Rs. 84,000
To find: The amount by which B and D's capital will be credited.
Calculation:
1. Calculate the current capital of B and D using the profit sharing ratio:
- Let the profit sharing ratio be 3x and x for B and D respectively.
- So, 3x + x = 90,000 + 30,000 (as per the given capital)
- 4x = 120,000
- x = 30,000
- B's capital = 3x = 3 * 30,000 = Rs. 90,000
- D's capital = x = Rs. 30,000
2. Calculate the new capital of B and D using the new ratio:
- Let the new ratio be 5y and 3y for B and D respectively.
- So, 5y + 3y = 90,000 + 30,000 (as per the given capital)
- 8y = 120,000
- y = 15,000
- B's new capital = 5y = 5 * 15,000 = Rs. 75,000
- D's new capital = 3y = 3 * 15,000 = Rs. 45,000
3. Calculate the increase in capital for B and D:
- Increase in B's capital = B's new capital - B's current capital = 75,000 - 90,000 = -15,000 (Decrease)
- Increase in D's capital = D's new capital - D's current capital = 45,000 - 30,000 = 15,000
4. Calculate the amount by which B and D's capital will be credited:
- Since B's capital has decreased, it will be credited with the goodwill value.
- The amount credited to B's capital = Goodwill value = Rs. 84,000
- The amount credited to D's capital = Increase in D's capital = Rs. 15,000
Therefore, the amount by which B and D's capital will be credited is Rs. 84,000 and Rs. 15,000 respectively.
Hence, the answer is option D: 60,000 and 24,000.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 6
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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:
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 6

Given information:
- Capital of B = Rs. 90,000
- Capital of D = Rs. 30,000
- Profit sharing ratio = 3:1
- New ratio = 5:3
- Goodwill value = Rs. 80,000
To find: Amount payable by a gaining partner to a sacrificing partner.
Calculation:
1. The total capital of the firm = Capital of B + Capital of D = Rs. 90,000 + Rs. 30,000 = Rs. 1,20,000.
2. The old profit sharing ratio is 3:1, which means B will get 3/4th of the profit and D will get 1/4th of the profit.
3. The new ratio is 5:3, which means B will get 5/8th of the profit and D will get 3/8th of the profit.
4. The change in ratio is from 3:1 to 5:3, which means B is gaining and D is sacrificing.
5. The gaining partner (B) will compensate the sacrificing partner (D) for the change in ratio.
6. The amount of compensation is calculated as follows:
- Goodwill = Rs. 80,000
- Total capital = Rs. 1,20,000
- Sacrificing partner's share in the total capital = (Capital of D / Total capital) x Goodwill
= (Rs. 30,000 / Rs. 1,20,000) x Rs. 80,000
= Rs. 20,000
7. Therefore, the amount payable by the gaining partner (B) to the sacrificing partner (D) is Rs. 20,000.
Answer: B. D will pay to B Rs. 20,000.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 7
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A, B and C are equal partners. D is admitted to the firm for one-fourth share. D brings Rs. 20,000 capital and Rs. 5,000 being half of the premium for goodwill. The value of goodwill of the firm is
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 7

To find the value of goodwill of the firm, we need to consider the following information:
- A, B, and C are equal partners.
- D is admitted to the firm for one-fourth share.
- D brings Rs. 20,000 capital and Rs. 5,000 being half of the premium for goodwill.
Let's calculate the total capital of the firm before D's admission:
- A's capital = B's capital = C's capital
- Total capital before D's admission = 3 * A's capital
Now, let's calculate the total capital of the firm after D's admission:
- Total capital after D's admission = Total capital before D's admission + D's capital
- Total capital after D's admission = 3 * A's capital + Rs. 20,000
Since D has been admitted for one-fourth share, the remaining three partners (A, B, and C) also have three-fourth share in the firm. Therefore, the ratio of D's capital to the total capital of the firm after D's admission is 1:4.
Using this ratio, we can calculate A's capital:
- A's capital = (3/4) * (Total capital after D's admission)
- A's capital = (3/4) * (3 * A's capital + Rs. 20,000)
Now, let's calculate the value of goodwill:
- Goodwill = Total capital after D's admission - Sum of capital of all partners
- Goodwill = (3 * A's capital + Rs. 20,000) - (A's capital + B's capital + C's capital)
We are given that D brings Rs. 5,000 as half of the premium for goodwill. This means that the remaining half of the premium for goodwill is Rs. 5,000. Since the premium for goodwill is shared equally by all partners, the total premium for goodwill is Rs. 10,000.
Therefore, the value of goodwill of the firm is Rs. 10,000.
Answer: A: Rs. 10,000
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 8
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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.
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 8
Calculation of Goodwill on Average Profit Method:
To calculate the goodwill on average profit method, we need to find the average profit for the given years.
Step 1: Calculate the total profits for the given years.
Total profit = Profit for 1998-99 + Profit for 1999-2000 + Profit for 2000-01
Total profit = Rs. 2,000 + Rs. 26,100 + Rs. 31,200
Total profit = Rs. 59,300
Step 2: Calculate the average profit.
Average profit = Total profit / Number of years
Average profit = Rs. 59,300 / 3
Average profit = Rs. 19,766.67
Step 3: Adjust the closing stock.
Closing stock for 1999-2000 = Rs. 26,100 + Rs. 2,200 (defective items)
Closing stock for 1999-2000 = Rs. 28,300
Closing stock for 2000-01 = Rs. 31,200 + Rs. 6,200 (defective items)
Closing stock for 2000-01 = Rs. 37,400
Step 4: Calculate the adjusted average profit.
Adjusted average profit = Average profit - (Closing stock for 1999-2000 - Closing stock for 2000-01)
Adjusted average profit = Rs. 19,766.67 - (28,300 - 37,400)
Adjusted average profit = Rs. 19,766.67 - 9,100
Adjusted average profit = Rs. 10,666.67
Step 5: Calculate the goodwill.
Goodwill = Adjusted average profit × Number of years
Goodwill = Rs. 10,666.67 × 3
Goodwill = Rs. 32,000
Therefore, the goodwill on average profit method is Rs. 32,000.
Answer:
The correct option is B: Rs. 17,700.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 9
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A and B are partners with capitals of Rs. 10,000 and Rs. 20,000 respectively and sharing profits equally. They admitted C as their third partner with one-fourth profits of the firm on the payment of Rs. 12,000. The amount of hidden goodwill is .
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 9

Let's calculate the hidden goodwill step by step:



  1. Initial Capital:


    • A's capital = Rs. 10,000

    • B's capital = Rs. 20,000

    • Total initial capital = Rs. 10,000 + Rs. 20,000 = Rs. 30,000


  2. Profit Sharing:


    • A and B share profits equally, so their share = 1/2 of total profit

    • C's share = 1/4 of total profit

    • Total profit = A's share + B's share + C's share = 1/2 + 1/2 + 1/4 = 1.25/2 = 5/8


  3. Admission of C:


    • C's share = 1/4 of total profit = 5/8 * Rs. 12,000 = Rs. 7,500

    • Remaining profit for A and B = Total profit - C's share = Rs. 12,000 - Rs. 7,500 = Rs. 4,500


  4. Hidden Goodwill:


    • A's capital + B's capital = Rs. 10,000 + Rs. 20,000 = Rs. 30,000

    • A's share of remaining profit = 1/2 * Rs. 4,500 = Rs. 2,250

    • B's share of remaining profit = 1/2 * Rs. 4,500 = Rs. 2,250

    • A's total capital after admitting C = A's capital + A's share of remaining profit = Rs. 10,000 + Rs. 2,250 = Rs. 12,250

    • B's total capital after admitting C = B's capital + B's share of remaining profit = Rs. 20,000 + Rs. 2,250 = Rs. 22,250

    • Hidden Goodwill = Total capital after admitting C - Initial total capital = Rs. 12,250 + Rs. 22,250 - Rs. 30,000 = Rs. 4,500



Therefore, the amount of hidden goodwill is Rs. 4,500.


So, the answer is None of the above (D).

Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 10
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X and Y share profits and losses in the ratio of 2 : 1. They take Z as a partner and the new profit sharing ratio becomes 3 : 2 : 1.  Z brings Rs. 4,500 as premium for goodwill.The full value of goodwill will be
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 10

Step 1: Calculate the initial profit sharing ratio between X and Y:


Let the initial profits be 2x and x for X and Y respectively.


So, the initial profit sharing ratio between X and Y is 2x : x = 2 : 1.


Step 2: Calculate the new profit sharing ratio after Z becomes a partner:


Let the new profit sharing ratios be 3x, 2x, and x for X, Y, and Z respectively.


The new profit sharing ratio is given as 3x : 2x : x = 3 : 2 : 1.


Step 3: Calculate the premium for goodwill:


Let the premium for goodwill be P.


According to the given information, Z brings Rs. 4,500 as premium for goodwill.


So, P = Rs. 4,500.


Step 4: Calculate the value of goodwill:


Let the full value of goodwill be G.


According to the given information, the new profit sharing ratio after Z becomes a partner is 3 : 2 : 1.


So, the ratio of the contributions of X, Y, and Z towards the premium for goodwill will be 3 : 2 : 1.


Therefore, the value of goodwill can be calculated using the proportion:


3x : 2x : x = P : P : P


3x : 2x : x = 4500 : 4500 : 4500


3x : 2x : x = 3 : 2 : 1


Comparing both sides, we can write:


3x/3 = 4500/3


x = 1500


Therefore, the full value of goodwill (G) = P + P + P = 4500 + 4500 + 4500 = 13500


Step 5: Final Answer:


The full value of goodwill is Rs. 13,500.


So, the correct answer is option C: Rs. 27,000.

Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 11
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Under average profit basis goodwill is calculated by:
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 11
Calculation of Goodwill under Average Profit Basis:
The calculation of goodwill under the average profit basis involves multiplying the number of years purchased with the average profits. Here is a detailed explanation:
1. Definition of Goodwill: Goodwill is an intangible asset that represents the reputation, customer loyalty, brand value, and other non-physical attributes of a business. It is the difference between the purchase price of a business and the fair market value of its net assets.
2. Average Profit: Average profit is calculated by dividing the total profit earned over a certain period by the number of years. It provides a measure of the sustainable profitability of a business.
3. Calculation: To calculate goodwill under the average profit basis, the following formula is used:
Goodwill = Number of years purchased × Average profits
- Number of years purchased: This refers to the number of years for which the future benefits of the business are expected to be realized. It is typically based on the assessment of the business's potential for generating profits in the future.
- Average profits: This represents the average annual profit earned by the business over a certain period. It is calculated by dividing the total profit earned over that period by the number of years.
4. Rationale behind the Calculation: The calculation of goodwill under the average profit basis is based on the assumption that the future profitability of the business will be consistent and sustainable. By multiplying the number of years purchased with the average profits, the formula takes into account the expected future economic benefits generated by the business.
5. Other Methods of Goodwill Calculation: While the average profit basis is one method of calculating goodwill, there are other approaches as well, such as the super profit method (multiplying the number of years purchased with the super profits) and the discounted future benefits method (summing up the present value of expected future benefits).
In conclusion, under the average profit basis, goodwill is calculated by multiplying the number of years purchased with the average profits. This method considers the sustainability of the business's profitability and provides an estimate of the value of its intangible assets.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 12
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Under super profit basis goodwill is calculated by:
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 12

Under super profit basis, goodwill is calculated by:


B: No. of years purchased multiplied with super profits.


Here is a detailed explanation of how goodwill is calculated under the super profit basis:


1. Understanding super profit:
Super profit refers to the excess profit earned by a business over and above the normal or expected profit. It is the difference between the actual profit and the normal profit. Normal profit is the profit that a business would typically earn in a similar industry or market.
2. Calculation of goodwill:
Under the super profit basis, goodwill is calculated by multiplying the number of years purchased with the super profits. The formula is as follows:
Goodwill = Number of years purchased * Super profits
3. Steps to calculate goodwill:
To calculate goodwill using the super profit basis, follow these steps:
- Determine the number of years for which the business is expected to earn super profits.
- Calculate the average super profit earned by the business over these years.
- Multiply the number of years purchased with the average super profit to get the goodwill value.
4. Example:
Let's consider an example to illustrate the calculation of goodwill under the super profit basis:
Assume a business is expected to earn super profits of $50,000 per year for the next 5 years. If an investor purchases the business for 3 years, the calculation of goodwill would be as follows:
Goodwill = 3 years * $50,000/year = $150,000
Therefore, the goodwill value under the super profit basis would be $150,000.
In conclusion, under the super profit basis, goodwill is calculated by multiplying the number of years purchased with the super profits. This method takes into account the excess profits generated by the business and reflects the value of its intangible assets.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 13
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Under annuity basis goodwill is calculated by:
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 13
Calculation of Goodwill under Annuity Basis:
Under the annuity basis, goodwill is calculated by summing up the discounted value of expected future benefits. Here's a detailed explanation of the calculation process:
1. Identify the expected future benefits:
- These benefits can include additional profits, cost savings, increased market share, or other advantages that the company expects to gain from acquiring the goodwill.

2. Determine the period of expected benefits:
- This refers to the number of years during which the company expects to receive these future benefits.

3. Determine the expected rate of return:
- This is the rate of return that the company expects to earn on its investment in the goodwill.

4. Calculate the discounted value of expected future benefits:
- Use the formula for the present value of an annuity to calculate the discounted value of the expected future benefits. The formula is:
PV = C x [1 - (1 + r)^(-n)] / r
- PV: Present value of the annuity (goodwill)
- C: Cash flow for each period (expected future benefits)
- r: Discount rate (expected rate of return)
- n: Number of periods (years of expected benefits)

5. Sum up the discounted values:
- Add up the discounted values of the expected future benefits for each period to calculate the total goodwill under the annuity basis.

Therefore, the correct option is C: Summation of the discounted value of expected future benefits.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 14
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Under capitalisation basis goodwill is calculated by:
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 14
Under capitalisation basis, goodwill is calculated by:
The correct answer is D: Super profit divided by the expected rate of return.
Here is a detailed explanation:
1. What is capitalisation basis?
- Capitalisation basis is a method used to calculate the value of goodwill in a business.
- It is based on the assumption that the value of a business is determined by its ability to generate profits.
2. What is goodwill?
- Goodwill represents the value of a business's reputation, customer relationships, brand name, and other intangible assets.
- It is an intangible asset that reflects the value of the business beyond its tangible assets.
3. How is goodwill calculated under capitalisation basis?
- Under capitalisation basis, goodwill is calculated by dividing the super profit by the expected rate of return.
4. What is super profit?
- Super profit is the excess profit earned by a business over and above the normal or expected profit.
- It represents the additional profit generated due to the presence of intangible assets like goodwill.
5. What is the expected rate of return?
- The expected rate of return is the rate of return that is considered reasonable or normal for a business in a particular industry or market.
- It is used as a benchmark to assess the profitability of a business and determine the value of goodwill.
6. Why is super profit divided by the expected rate of return?
- Dividing the super profit by the expected rate of return helps determine the value of goodwill as a multiple of the excess profit.
- This calculation takes into account the risk associated with the business and the expected return on investment.
In conclusion, under capitalisation basis, goodwill is calculated by dividing the super profit by the expected rate of return. This method considers the excess profit generated by the business and the normal rate of return expected in the industry.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 15
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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.
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 15
Calculation of Goodwill:
To calculate the value of goodwill, we need to determine the average profit of the business over the given period of time and then multiply it by the number of years of purchase.
Step 1: Calculate the average profit:
Average Profit = (Profit in 2003 + Profit in 2004) / 2
Average Profit = (Rs. 75,000 + Rs. 60,000) / 2
Average Profit = Rs. 67,500
Step 2: Calculate the value of goodwill:
Goodwill = Average Profit * Number of Years of Purchase
Number of Years of Purchase = 5 years (as given in the question)
Goodwill = Rs. 67,500 * 5
Goodwill = Rs. 3,37,500
Therefore, the value of goodwill is Rs. 3,37,500.
Conclusion:
The value of goodwill for the partnership firm is Rs. 3,37,500.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 16
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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.
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 16
Calculation of Super Profits:
- Super profits = Average annual profits - Normal profits
- Average annual profits = (2003-04 Profits + 2004-05 Profits) / 2 = (Rs. 98,000 + Rs. 76,000) / 2 = Rs. 87,000
- Normal profits = Average capital employed * Rate of interest = Rs. 2,00,000 * 12% = Rs. 24,000
- Super profits = Rs. 87,000 - Rs. 24,000 = Rs. 63,000
Calculation of Goodwill:
- Goodwill = Super profits * Number of years purchase
- Number of years purchase = 2 (given)
- Goodwill = Rs. 63,000 * 2 = Rs. 1,26,000
Calculation of Average Capital Employed:
- Average capital employed = Sum of capital employed in each year / Number of years
- Sum of capital employed = Rs. 2,00,000 (given)
- Number of years = 4 (2001-02, 2002-03, 2003-04, 2004-05)
- Average capital employed = Rs. 2,00,000 / 4 = Rs. 50,000
Calculation of Normal Profits:
- Normal profits = Average capital employed * Rate of interest = Rs. 50,000 * 12% = Rs. 6,000
Calculation of Average Annual Profits:
- Average annual profits = Normal profits + Super profits
- Average annual profits = Rs. 6,000 + Rs. 63,000 = Rs. 69,000
Calculation of Remuneration of Partners:
- Remuneration of partners = Rs. 1,000 per month * 12 months = Rs. 12,000
Calculation of Adjusted Average Annual Profits:
- Adjusted average annual profits = Average annual profits - Remuneration of partners
- Adjusted average annual profits = Rs. 69,000 - Rs. 12,000 = Rs. 57,000
Calculation of Goodwill based on Adjusted Average Annual Profits:
- Goodwill = Adjusted average annual profits * Number of years purchase
- Number of years purchase = 2 (given)
- Goodwill = Rs. 57,000 * 2 = Rs. 1,14,000
Value of Goodwill based on Two Years Purchase of Super Profits:
- Value of Goodwill = Goodwill based on Adjusted Average Annual Profits - Goodwill based on Average Annual Profits
- Value of Goodwill = Rs. 1,14,000 - Rs. 1,26,000 = -Rs. 12,000
Since the value of goodwill is negative, it indicates that there is no goodwill in the business. Therefore, the correct answer is option B: Rs. 8,750.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 17
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The profits for the last three years are 2002-03 Rs. 42,500; 2003-04 Profits Rs. 56,000 & 2004-05 Profits Rs. 68,000. The total assets of the firm are Rs. 11,52,500 and the total liabilities of the firm are Rs. 10,00,000 of which outsiders liabilities is Rs. 5,00,000.The rate of interest expected from capital invested is 10%. Calculate the value of goodwill on capitalization basis.
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 17
Calculation of Goodwill on Capitalization Basis:
Given Information:
- Profits for the last three years:
- 2002-03: Rs. 42,500
- 2003-04: Rs. 56,000
- 2004-05: Rs. 68,000
- Total assets of the firm: Rs. 11,52,500
- Total liabilities of the firm: Rs. 10,00,000
- Outsiders liabilities: Rs. 5,00,000
- Rate of interest expected from capital invested: 10%
Step 1: Calculation of Average Profits
Average Profits = (Profits of 2002-03 + Profits of 2003-04 + Profits of 2004-05) / 3
Average Profits = (42,500 + 56,000 + 68,000) / 3
Average Profits = 166,500 / 3
Average Profits = Rs. 55,500
Step 2: Calculation of Capitalized Value
Capitalized Value = Average Profits / Rate of Interest
Capitalized Value = 55,500 / 10% (convert 10% into decimal by dividing by 100)
Capitalized Value = 55,500 / 0.10
Capitalized Value = Rs. 5,55,000
Step 3: Calculation of Goodwill
Goodwill = Capitalized Value - (Total Assets - Total Liabilities)
Goodwill = 5,55,000 - (11,52,500 - 10,00,000)
Goodwill = 5,55,000 - 1,52,500
Goodwill = Rs. 4,02,500
Therefore, the value of Goodwill on capitalization basis is Rs. 4,02,500.
Answer: C) Rs. 4,02,500
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 18
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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 four years purchase of super profits based on the annuity of the four years. Take discounting rate as 10%.
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 18
Calculation of Super Profits:
- Super profits are calculated by subtracting the normal rate of return from the average capital employed.
- Normal rate of return = Capital Employed × Rate of Interest
- Average capital employed = Rs. 2,00,000
- Rate of interest = 12%
- Normal rate of return = 2,00,000 × 12% = Rs. 24,000
- Super profits = Average capital employed - Normal rate of return
- Super profits = 2,00,000 - 24,000 = Rs. 1,76,000
Calculation of Annuity:
- Annuity is calculated using the formula: Annuity = Super profits × (1 - (1 + r)^(-n))/r
- r = discounting rate = 10%
- n = number of years = 4
- Annuity = 1,76,000 × (1 - (1 + 10%)^(-4))/10%
- Annuity = 1,76,000 × (1 - (1 + 0.1)^(-4))/0.1
- Annuity = 1,76,000 × (1 - 1.4641)/0.1
- Annuity = 1,76,000 × (-0.4641)/0.1
- Annuity = -1,64,491
Calculation of Goodwill:
- Goodwill is calculated by multiplying the annuity by the number of years purchase.
- Number of years purchase = 4
- Goodwill = Annuity × Number of years purchase
- Goodwill = -1,64,491 × 4
- Goodwill = -6,57,964
Calculation of Average Profits:
- Average profits are calculated by taking the average of the profits and losses for the last four years.
- Average profits = (98,000 + 76,000 - 10,000 - 2,500)/4
- Average profits = 1,61,500/4
- Average profits = Rs. 40,375
Calculation of Normalized Profits:
- Normalized profits are calculated by subtracting the remuneration of partners from the average profits.
- Remuneration of partners = Rs. 1,000 per month × 12 months = Rs. 12,000
- Normalized profits = Average profits - Remuneration of partners
- Normalized profits = 40,375 - 12,000
- Normalized profits = Rs. 28,375
Calculation of Adjusted Goodwill:
- Adjusted Goodwill = Goodwill + Normalized Profits
- Adjusted Goodwill = -6,57,964 + 28,375
- Adjusted Goodwill = -6,29,589
Final Calculation of Goodwill:
- The value of Goodwill cannot be negative, so we take the absolute value.
- Goodwill = |Adjusted Goodwill|
- Goodwill = |-6,29,589|
- Goodwill = Rs. 6,29,589
Therefore, the value of Goodwill on the basis of four years purchase of super profits based on the annuity of
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 19
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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 four years purchase of super profits based on the annuity of the four years. Take discounting rate as 10%.
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 19
Calculation of Super Profits:

  • Super Profits = Average Profits - Normal Profits

  • Normal Profits = Average Capital Employed * Rate of Interest

  • Average Profits = (Profit of 2003-04 + Profit of 2004-05) / 2

  • Normal Profits = 2,00,000 * 12% = Rs. 24,000

  • Average Profits = (98,000 + 76,000) / 2 = Rs. 87,000

  • Super Profits = 87,000 - 24,000 = Rs. 63,000


Calculation of Goodwill:

  • Goodwill = Super Profits * Number of Years Purchase

  • Number of Years Purchase = 4

  • Goodwill = 63,000 * 4 = Rs. 2,52,000


Calculation of Present Value of Goodwill:

  • Discounting Rate = 10%

  • Number of Years = 4

  • Present Value of Goodwill = Goodwill / (1 + Discounting Rate)^Number of Years

  • Present Value of Goodwill = 2,52,000 / (1 + 0.10)^4 = Rs. 13,868


Therefore, the value of goodwill on the basis of four years purchase of super profits based on the annuity of the four years is Rs. 13,868.

Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 20
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A, B and C are partners sharing profits and loss in the ratio 3:2:1. They decide to change their profit sharing ratio to 2:2:1. To give effect to this new profit sharing ratio they decide to value the goodwill at Rs. 30,000. Pass the necessary journal entry if Goodwill not appearing in the old balance sheet and should not appear in the new balance sheet.
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 20
Journal Entry to Adjust Goodwill:
Partners' Capital Accounts:
- A's Capital Account Dr. ₹2,000
- C's Capital Account Dr. ₹1,000
- To A's Capital Account ₹3,000
Goodwill Account:
- Goodwill Account Dr. ₹30,000
- To A's Capital Account ₹15,000
- To B's Capital Account ₹10,000
- To C's Capital Account ₹5,000
Partners' Capital Accounts:
- A's Capital Account Dr. ₹12,000
- B's Capital Account Dr. ₹12,000
- C's Capital Account Dr. ₹6,000
- To Goodwill Account ₹30,000
Partners' Capital Accounts:
- A's Capital Account Dr. ₹3,000
- To B's Capital Account ₹2,000
- To C's Capital Account ₹1,000
Explanation:
- The initial profit sharing ratio among partners A, B, and C was 3:2:1.
- They decided to change the profit sharing ratio to 2:2:1.
- To give effect to the new ratio, the goodwill needs to be valued at ₹30,000.
- The journal entries are made to adjust the capital accounts and goodwill account accordingly.
- A's capital account is debited with ₹2,000 in the first entry and credited with ₹15,000 in the second entry.
- B's capital account is not directly affected by the adjustment and is only credited with ₹10,000 in the second entry.
- C's capital account is debited with ₹1,000 in the first entry and credited with ₹5,000 in the second entry.
- The goodwill account is debited with ₹30,000 in the second entry and credited with ₹30,000 in the third entry.
- The final entry adjusts the capital accounts according to the new profit sharing ratio. A's capital account is debited with ₹3,000, and B's and C's capital accounts are credited accordingly.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 21
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​Goodwill brought in by incoming partner in cash for joining in a partnership firm is taken away by the old partners in their ……… ratio.
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 21
Explanation:
When a new partner joins a partnership firm, they bring in their share of goodwill in the form of cash. This goodwill is a valuable asset of the firm and is usually recorded in the books of accounts. However, the treatment of this goodwill depends on the agreement between the partners. In this case, the old partners take away the goodwill brought in by the incoming partner in their sacrificing ratio.
Here's a detailed explanation:
1. Goodwill: Goodwill is an intangible asset that represents the reputation and customer loyalty of a business. When a new partner joins a partnership firm, they may bring in additional goodwill in the form of cash. This cash is considered as their contribution to the firm's goodwill.
2. Old Partners: The old partners are the existing partners of the firm who were already running the business before the new partner joined. They have a certain share in the firm's profits and losses, as well as in the assets and liabilities of the firm.
3. Sacrificing Ratio: The sacrificing ratio is the ratio in which the old partners agree to reduce their share of profits in order to accommodate the new partner. This ratio is determined based on various factors such as the new partner's investment, their skills and expertise, and the overall value they bring to the firm.
4. Treatment of Goodwill: In this case, the old partners take away the goodwill brought in by the incoming partner in their sacrificing ratio. This means that the old partners will receive a larger share of the incoming partner's goodwill, while the incoming partner's share of goodwill will be reduced.
5. Impact on Capital: The capital of the partnership firm is not directly affected by the incoming partner's goodwill. The capital represents the total investment made by all partners, including the new partner. The goodwill brought in by the incoming partner is considered as a separate asset and is accounted for separately.
In conclusion, when a new partner brings in goodwill in the form of cash, the old partners take away this goodwill in their sacrificing ratio. This allows for a fair distribution of the firm's assets and ensures that the new partner's contribution is appropriately recognized.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 22
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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
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 22
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.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 23
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Goodwill bought in by incoming partner in cash for joining in a partnership firm is taken away by the old partners in:
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 23
Explanation:
When a new partner joins a partnership firm, the existing partners may agree to allow the new partner to bring in a certain amount of goodwill in cash. Goodwill is an intangible asset that represents the reputation and customer base of a business.
In this scenario, the goodwill brought in by the incoming partner is taken away by the old partners in the sacrificing ratio. The sacrificing ratio is determined when a partner retires or a new partner joins the firm and it represents the adjustment in the profit sharing ratio of the existing partners.
Here's a breakdown of the options and why the answer is the sacrificing ratio:
A: Old Profit Sharing Ratio: The old profit sharing ratio is the ratio in which the existing partners were sharing profits before the new partner joined. However, the question states that the goodwill is taken away by the old partners, indicating a change in the profit sharing ratio.
B: New Profit Sharing Ratio: The new profit sharing ratio represents the ratio in which the profits will be shared after the new partner joins. Again, the question states that the goodwill is taken away by the old partners, not the new partner.
C: Sacrificing Ratio: The sacrificing ratio determines the adjustment in the profit sharing ratio of the existing partners when a new partner joins. It represents the amount of sacrifice made by the existing partners to accommodate the new partner. Therefore, it is the correct answer in this scenario.
D: Capital Ratio: The capital ratio represents the ratio in which the partners have invested capital in the firm. It is not relevant to the distribution of goodwill.
To summarize, the old partners take away the goodwill brought in by the incoming partner in the sacrificing ratio.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 24
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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?
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 24

Given:
- A and B are partners with capital of Rs. 50,000 and Rs. 40,000 respectively.
- They share profits and losses equally.
- C is admitted with a capital of Rs. 50,000.
- Nothing was bought against goodwill.
- Goodwill in the balance sheet is revalued as Rs. 35,000.
To find: The value of goodwill in the books after the admission of C.
Solution Steps:
1. Calculate the total capital of A and B before the admission of C: Rs. 50,000 + Rs. 40,000 = Rs. 90,000.
2. Calculate the total capital after the admission of C: Rs. 90,000 + Rs. 50,000 = Rs. 1,40,000.
3. Calculate the existing goodwill by subtracting the total capital from the revalued amount: Rs. 35,000 - Rs. 1,40,000 = -Rs. 1,05,000.
4. Since goodwill cannot be negative, the value of existing goodwill is considered zero.
5. Calculate the share of goodwill for each partner:
- A's share of goodwill = (A's capital / Total capital) * Existing goodwill = (Rs. 50,000 / Rs. 1,40,000) * Rs. 0 = Rs. 0.
- B's share of goodwill = (B's capital / Total capital) * Existing goodwill = (Rs. 40,000 / Rs. 1,40,000) * Rs. 0 = Rs. 0.
6. Calculate the new value of goodwill after the admission of C:
- C's share of goodwill = (C's capital / Total capital) * Existing goodwill = (Rs. 50,000 / Rs. 1,40,000) * Rs. 35,000 = Rs. 12,500.
- Total goodwill in the books = A's share of goodwill + B's share of goodwill + C's share of goodwill = Rs. 0 + Rs. 0 + Rs. 12,500 = Rs. 12,500.
Therefore, the value of goodwill in the books after the admission of C is Rs. 12,500.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 25
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Following are the factors affecting goodwill except:
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 25
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.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 26
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Weighted average method of calculating goodwill should be followed when:
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 26
Weighted Average Method of Calculating Goodwill
The weighted average method of calculating goodwill should be followed when profits are uneven or have a changing trend. This method takes into account the different profit levels over a period of time and provides a more accurate representation of the company's overall performance.
Reasons to use the weighted average method:
- Uneven profits: If the profits of a company vary significantly from year to year, using the weighted average method helps to smooth out the fluctuations and provide a more stable measure of goodwill.
- Increasing trend: When profits show an increasing trend, the weighted average method is useful in capturing the growth rate and reflecting the company's potential for future earnings.
- Decreasing trend: Similarly, when profits have a decreasing trend, the weighted average method considers the decline in performance and adjusts the goodwill calculation accordingly.
Advantages of using the weighted average method:
- Accuracy: This method provides a more accurate representation of the company's overall performance by taking into account the varying profit levels over time.
- Stability: By smoothing out fluctuations in profits, the weighted average method provides a more stable measure of goodwill, which can be useful for decision-making and financial analysis.
- Predictive value: When profits show a trend, the weighted average method helps to capture and reflect the company's potential for future earnings, making it a valuable tool for forecasting and planning.
In conclusion, the weighted average method of calculating goodwill should be followed when profits are uneven or have a changing trend. This method provides a more accurate and stable measure of the company's performance and takes into account the potential for future earnings.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 27
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In the absence of any provision in the partnership agreement, profits and losses are shared
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 27
Explanation:
To answer this question, we need to understand the default rules regarding the sharing of profits and losses in a partnership agreement. In the absence of any specific provision in the partnership agreement, the default rules apply.
The default rule states that profits and losses are shared equally among the partners. This means that each partner receives an equal share of the profits and is responsible for an equal share of the losses.
Here is a detailed explanation of the options and why option B is the correct answer:
A: In the ratio of capitals.
- This option suggests that the profits and losses are shared based on the capital contributions of each partner. However, in the absence of any provision in the partnership agreement, this is not the default rule.
B: Equally.
- This option is correct. In the absence of any provision, the default rule is that profits and losses are shared equally among the partners. Each partner receives an equal share of the profits and is responsible for an equal share of the losses.
C: In the ratio of loans given by them to the partnership firm.
- This option suggests that the profits and losses are shared based on the loans given by each partner to the partnership firm. However, in the absence of any provision in the partnership agreement, this is not the default rule.
D: None of the above.
- This option is incorrect. The correct answer is option B, which states that profits and losses are shared equally in the absence of any provision in the partnership agreement.
In conclusion, in the absence of any provision in the partnership agreement, the default rule is that profits and losses are shared equally among the partners.
Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 28
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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?
Detailed Solution for Test: Treatment Of Goodwill In Partnership Accounts - 3 - Question 28
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.
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