Wormcneer - 2 ACCOUNTING FOR PARTNERSHIP FIRMS—GOODWILL MIND MAP Valuation of Goodwill — > —_,, ‘Average Profit Method ‘Actual/verage Prot x Number of Years! purchase Goodwi Where, Actual or Adjusted Average Profit = Sum of Normal Profts/ Total No. of Years for which proioss is given ‘Super Profit Method Goodwill = Super Profit x Number of ‘Yeats’ purchase Where, Super Prot = Actual/Average Profit — Normal Profit Normal Profit = Capital Empoyed x Normal Rate of Returt/100 ‘Actual or Adjusted Average Profit = Sum of Norma Prof Tota Number of Years Capitalisation Method | Capitalisation of Average Normal Profit = Capitalsed Value ~ Net Assets (Actual Capital) Good here, Net Assets = Toll Assets (excluding goodwil, itous assets and on-trade investments — Outside Liabilities. Captaised Value = Actual/Average Profit x 100/ Rate of Retuin Note: 4, Actual or Adjusted Proft = Net Prof Abnormal Gain + Abnormal Loss — Normal Expenses Capitalisation of Super Profit Good ‘Super Profit x 100 Rate of Return Where, Super Profit = Actual or Adjusted Average Profit = Normal Prof Normal Profit = Capital Employed x Rate of Retury100 ‘Actua or Adjusted Average Proft ‘= Sum of normal profi Total No, of Years= Multiple Choice Questions 1, The value of Goodwill can be defined as excess of amount paid for business over and above its 7 (@ Total Assets (6) Current Assets (o) Net worth (@) Working capital 4, The average capital employed in a business js € 5,00,000 and the average net profit eamed is € 65,000. If normal rate of return on capital employed is 8% and a remuneration of & 20,000 is expected, then the super profit of the concem is: (a % 15,000 (®) % 5,000 (0) © 25,000 (d) %5,200 3, Capital employed of a firm is % 3,00,000. The annual profit earned by the firm during the year is € 48,000. The money could be kept in a bank for 5 years at 10% p.a. considering 2% as fair compensation for risk involved in business, the goodwill of the firm on the basis of capitalisation will be: (a) € 1,00,000 (b) % 1,80,000 (©) %1,20,000 (d) None of these 4, 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 (6) Calculation of the goodwill (©) Both (a) and (b) (@) None of the above 5. The excess amount which the firm can get on selling its assets over and above the saleable value of its assets is called [DoE] (a) Surplus (b) Reserve (c) Super Profits (d) Goodwill 6. When goodwill is not purchase, goodwill account can: [Dok] (a) Never be raised in the books (b)_ Be raised in the books (c) Be partially raised in the books. (d) Be raised as per partnership deed 7. Weighted average method of calculatit goodwill be used: [DoE] (a) When profits are fluctuating (&) When profits show a trend (©) When Profits are not equal (d) None of the above 8 Goodwill is not accounted in the books if [Kvs] (a) Itis a Purchased Goodwill (0) Itis a Self Generated Goodwill (© It is decided to be accounted by the Partners (@ Its amount is paid by the Gaining Partner 9. The Formula for Capitalisation of Super Profit Method is: [DoE] (a) Super Profit x No. of years Purchase (b) Super Profit x 100/Normal rate of return (6) (Super Profit - Normal Profit) x 100 / Normal Rate of Return (d) None of the above 10. Which of the following is not true in relation to Goodwill? [DoE] (a) Itis an intangible asset (0) Itisa fictitious asset (©) Ithas a realisable value (d) All of these11, Capital employed by a firm is € 5,00,000, Its average profit is € 60,000, ‘The normal rate of return in similar type of business is 10%. ‘The amount of super profits is IKVs} (a) © 50,000 (b) © 10,000 (©) % 6,000 (@) © 56,000 12, A firm carns © 2,20,000, ‘The normal rate of return is 10%, The assets of the firm amounted to © 22,00,000 and liabilities are %2,00,000, Valucof goodwill by capitalisation of actual average profits will be: (a) = 10,000 (b) & 2,00,000 (c) %4,00,000 (a) % 20,000 13. Profits of last three years are % 4,20,000; % 3,90,000 and % 4,50,000, The value of goodwill on the basis of two years purchase of three year average profit is: (a) % 3,60,000 (b) & 12,60,000 (c) % 8,40,000 (d) % 4,20,000 14, The profits of last three years are & 4,20,000, %3,90,000 and % 4,50,000. Capital employed is € 40,00,000 and normal rate of return is 10%. The amount of goodwill calculated on the basis of super profit method for three years of purchase will be: (a) % 80,000 (b) € 40,000 (c) % 20,000 (d) € 60,000 15. Total capital employed by a partnership firm is = 10,00,000 and its actual average profit is € 2,50,000. Normal rate of return is 20% in similar firms working under similar conditions. The firm earns super profit of: (a) % 50,000 () % 40,000 (c) % 30,000 (a) % 20,000 16. Goodwill is to be calculated at one year’s purchase of the average of last three years profit. The profit of the first year was £60,000, second year twice the profit g one sind fi the first year and the third times of the profit of second ood yi amount will be: (a) © 1,50,000 (c) % 1,00,000 17. The profits earned by a busi 5 years are as follows: 2 12,000; % 13,009 % 14,000; % 18,000 and % 2,000 (loss), Base ‘on two years purchase of the last 5 year profits, value of goodwill will be: (a) % 23,600 (b) % 22,000 (oc) © 1,10,000 (d) % 1,18,000 18. The goodwill ofa firm is % 54,000 valued z 4 years purchase of super profit. The capit: employed of firm is & 2,00,000 and norm: rate of return is 10%. The average profit c (b) % 1,20,000 (d) 7 1,30,000 8 over the la firm is: (a) % 23,500 (b) % 33,500 (co) % 20,000 (d % 24,500 19. If average capital employed in a firm | & 5,00,000 actual profit is ¥ 70,000 ar normal rate of return is 10%, then sup profit is: (a) = 40,000 (b) % 30,000 (&) % 50,000 (d) % 20,000 20. Goodwill of the firm on the basis of 2 yea purchase of average profit of the last 3 ye: is % 25,000. Find average profit. (a) % 50,000 (b) & 25,000 (c) % 10,000 (a) & 12,500 21. Calculate the value of goodwill at 3 ye purchase when: Capital employed 2,50,0 Average profit ¥ 30,000 and normal rate return is 10%. (a) %3,000 (c) % 30,000 (b) % 25,000 (a) % 15,00023. 24, 2 26. z gp. What are super profits? (a) Actual profit ~ Normal Profit (6) Normal profit - Actual Profit (0) Actual profit + Normal Profit (a) None of the above ‘The net assets of the firm including fictitious assets of € 5,000 are & 85,000, The net liabilities of the firm are % 30,000. The normal rate of return is 10% and the average profits of the firm are € 8,000. Calculate the goodwill as per capitalization of super profits. (a) % 20,000 (b) = 30,000 (©) © 25,000 (@) None of these Under which method of valuation of goodwill, normal rate of return is not considered? (a) Average profit method (b) Capitalisation method (0) Super profit method (@ Allof these 8, Following are the methods of calculating goodwill except: (a) Super profit method (D) Average profit method (c) Weighted Average profit method (@) Capital profit method The goodwill of the firm is not affected by: (a) Location of the firm (6) reputation of the firm (6) Better customer services (A) None of these 7. Capital invested in a firm is € 5,00,000. Normal rate of return is 10%. Average profits of the firm are % 64,000 (after an abnormal loss of & 4,000). Value of goodwill at four times the super profits will be: (@ % 72,000 (b) % 40,000 (©) %2,40,000 — (@) © 1,80,000 28, Average profit is % 5,00,000. Capital employed is % 40,00,000. Normal rate of return is 8%, The value of goodwill on the basis of capitalisation of super profit is: (a) © 22,50,000 (b) %25,00,000 (c) © 32,50,000 (d) % 15,50,000 29. Which of the following is added to previous year’s profit for finding normal profit for valuation of goodwill? (a) Profit on sale of fixed asset (b) Loss due to fire (c) Overvaluation of closing stock @) All of these 30. Identify the correct order for calculating goodwill under Capitalisation of Average Profit Method: (i) Calculate capitalised value of the firm (ii) Ascertain the value of net assets, on the date of valuation of goodwill (iii) Calculate average profit eamed (iv) Find the difference between capitalised. value of the firm and net assets (@) @, @), Gi), @&) (©) @), Gi), >), © ©) Gil), @, @), @) @ &), Gi), @, O 31. A firm eared average profit of & 45,000. Rate of return on capital employed is 12% pa. Total capital employed is € 4,00,000. Goodwill on the basis of two years purchase of super profit is: (@) 26,000 (&) % 12,000 (©) = 18,000 (d) None of theseNote: In the given questions (Q.32 to Q.41), a statement of assertion followed by a statement of reason is given. Choose the correct answer Out of the following choices. @ Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) () Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A) (© Assertion (A) is true but Reason (R) is false (@ Assertion (A) is false but Reason (R) is true 32. Assertion (A): Goodwill belongs to the category of intangible assets such as patents, trademarks, copy rights, etc, Reason (R): Goodwill cannot be seen or touched, 33. Assertion (A): Purchased goodwill means goodwill for which a consideration has been Paid. Reason (R): It is shown in Balance Sheet as a liability. 34. Assertion (A): Abnormal loss of a year should be subtracted from the net profit of the year for the calculation of ‘goodwill. Reason (R): Future profits depend upon the average performance of the business in the past. 35. Assertion (A): Weighted average profit method is considered better than the simple average profit method because it assigns more weightage to the profits of the latest year which is more likely £0 be earneg if future. Reason (R): The highest weight is atacheg to the profit of the most recent year 36. Assertion (A): An older business is tikey to have lesser goodwill. Reason (R): The number of customers ofan older business will be more in comparison to the customers of new entrants, 37. Assertion (A): A new business is likely g have lesser goodwill. Reason (R): Goodwill is an intangible asset 38. Assertion (A): Goodwill requires adjustment at the time of reconstitution of a firm. Reason (R): The nature and location of business do not affect the valuation of goodwill. 39. Assertion (A): Any firm that earns normal Profits or is incurring losses has no goodwill. Reason (R): Goodwill is the value of the reputation of a firm in respect of the Profits expected in future over and above the normal profits. 40. Assertion (A): Over a period of time, a well- established business develops an advantage of good name, reputation and wide business connections, Reason (R): Self - generated goodwill is shown as an asset in the books. 41. Assertion (A): It is as an intangible asset. Reason (R): The goodwill is calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue.