Firm has earned exceptionally high profits from a contract which will not be renewed. In such a cash the profit from this contract will not be included in ______.a)Profit sharing of the partners.b)Calculation of the goodwill.c)Bothd)NoneCorrect answer is option 'B'. Can you explain this answer?

Question

Answer

Because it is not related to the admission or retirement of the partners. At the time of admission or retirement goodwill will be calculated.

Answer

Calculation of the Goodwill:

Goodwill is the intangible asset that represents the reputation, brand value, customer loyalty, and other factors that contribute to the firm's ability to generate profits. When calculating the goodwill of a firm, the profits earned from a specific contract that will not be renewed should not be included. This is because the profits from this contract are not sustainable in the long term, and therefore do not reflect the true earning potential of the firm.

Profit Sharing of the Partners:

Profit sharing among partners is typically based on the overall profits of the firm. Since the profits earned from the contract that will not be renewed are exceptionally high, including them in the profit-sharing calculations would distort the distribution of profits among partners. It is important to exclude these profits to ensure a fair distribution among partners based on the firm's sustainable earnings.

Both:

Excluding the profits from the non-renewed contract from both the calculation of goodwill and profit sharing among partners is essential to provide an accurate representation of the firm's financial health and performance. By excluding these profits, the firm can avoid overvaluing its goodwill and ensure a fair distribution of profits among partners based on sustainable earnings.

In conclusion, the profits earned from a contract that will not be renewed should not be included in the calculation of goodwill or profit sharing among partners. This ensures a more accurate representation of the firm's financial position and prevents any distortions in the distribution of profits.

Similar Class 12 Doubts

A and B are partners sharing the profit the ratio of 3:2. They take C as the new partner, who brings in Rs. 25,000 against capital and Rs. 10,000 against goodwill. New profit sharing ratio is 1:1:1. In what ratio will this amount will be shared among the old partners A & B.

Verma and sharma are partners in firm sharing profits and losses in thr ratio of 5:3. they admitted ghosh as a new partner for 1/5th share of profits. ghosh is to bring in rs 20000 as capital and rs 4000 as his share of goodwill premium. give necessary journal entries (

What does the term "sacrificing ratio" refer to in the context of the admission of a new partner?

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