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Firm has earned exceptionally high profits from a contract which will not be renewed.
In such a case the profit from this contract will not be included in ………
In such a case the profit from this contract will not be included in ………
- a)Profit sharing of the partners.
- b)Calculation of the goodwill.
- c)Both.
- d)None.
Correct answer is option 'B'. Can you explain this answer?
Verified Answer
Firm has earned exceptionally high profits from a contract which will ...
Explanation:
The profit earned from a contract that will not be renewed will not be included in the calculation of goodwill. Here's a detailed explanation:
1. Profit sharing of the partners:
- The profit earned from the contract will not be included in the profit sharing of the partners.
- This is because the contract will not be renewed, and therefore, the profit from it is not considered as part of the ongoing business operations.
2. Calculation of the goodwill:
- Goodwill is an intangible asset that represents the reputation and value of a business.
- It is typically calculated based on the future earning potential of the business.
- Since the contract will not be renewed, the profit from it is not considered as part of the future earning potential.
- Therefore, the profit earned from the contract will not be included in the calculation of goodwill.
3. Both:
- The profit earned from the contract will not be included in both the profit sharing of the partners and the calculation of goodwill.
- This is because the contract will not be renewed, and the profit from it is not considered as part of the ongoing business operations or future earning potential.
4. None:
- This option is incorrect because the profit earned from the contract is excluded from either the profit sharing of the partners or the calculation of goodwill.
- It is important to consider the impact of the contract's non-renewal on the financial statements and accounting practices of the firm.
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The profit earned from a contract that will not be renewed will not be included in the calculation of goodwill. Here's a detailed explanation:
1. Profit sharing of the partners:
- The profit earned from the contract will not be included in the profit sharing of the partners.
- This is because the contract will not be renewed, and therefore, the profit from it is not considered as part of the ongoing business operations.
2. Calculation of the goodwill:
- Goodwill is an intangible asset that represents the reputation and value of a business.
- It is typically calculated based on the future earning potential of the business.
- Since the contract will not be renewed, the profit from it is not considered as part of the future earning potential.
- Therefore, the profit earned from the contract will not be included in the calculation of goodwill.
3. Both:
- The profit earned from the contract will not be included in both the profit sharing of the partners and the calculation of goodwill.
- This is because the contract will not be renewed, and the profit from it is not considered as part of the ongoing business operations or future earning potential.
4. None:
- This option is incorrect because the profit earned from the contract is excluded from either the profit sharing of the partners or the calculation of goodwill.
- It is important to consider the impact of the contract's non-renewal on the financial statements and accounting practices of the firm.
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Firm has earned exceptionally high profits from a contract which will not be renewed.In such a case the profit from this contract will not be included in a)Profit sharing of the partners.b)Calculation of the goodwill.c)Both.d)None.Correct answer is option 'B'. Can you explain this answer?
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