QUESTION BANK (Goodwill & Change in Profit and Loss Sharing Ratio )

VERY SHORT ANSWER QUESTION (INCLUDING HOTS)

Q.1. Define Goodwill.

Q.2. Name two factors affecting the value of Goodwill of a firm.
Q.3. What type of asset is Goodwill?
Q.4. Why sis Goodwill considered as an Intangible Asset but not a Fictitious Asset?
Q.5. Sate two occasions when there is a need of vacation of Goodwill.
Q.6. How do locations affect the Goodwill of a business?
Q.7. How does the factor ‘efficiency of management’ affect the Goodwill of a firm?
Q.8. How does the factor ‘quality of product’ affect the Goodwill of a firm?
Q.9. Name two methods of valuation of Goodwill.
Q.10. Give the formula for valuation of Goodwill by Average Profit Method.
Q.11. Give the formula for valuation of Goodwill by Super Profit Method.
Q.12. What do you understand by Super profit?
Q.13. What do you mean by Normal profit?
Q.14. What do you mean by Normal Rate of Return?
Q.15. When will you record Goodwill in the books, as per Accounting Standard- 26 (AS-26)?

PRACTICAL PROBLEM

Problem 1. X and Yare partners sharing profits and losses in the ratio of 3:2. They admit Z for 1/5 th share. For this
purpose, the Goodwill of the firm is to be valued on the basis of three years’ purchase of last five year’s average profits.
The profits were:
Year 2003-04 2004-05 2005-06 2006-07 2007-08
Profits (Rs) 50,000 (60,000) Loss 40,000 65,000 80,000

The profits of 2004-05 was calculated after charging Rs. 5,000 for loss of goods by fire. Calculated the Goodwill of the
firm

Problem 2. Calculated the value of Goodwill as on 1st January, 2009 on the basis of three year’s purchase of the average
profits of the last five year. The profits and losses for the years were: 2004--- (Loss) Rs. 8,000 (including Profits on sale of
furniture during the year Rs. 4,000), 2005--- Rs. 1,84,000, 2006--- Rs. 1,00,000 (profits on sale of machinery during the
years Rs. 10,000); 2007—Rs. 1,50,000; 2008—Rs. 1,80,000 (including loss on sale of computer Rs. 10,000).

Problem 3. Brick, Sand and Cement were in Parnership charing profits and losses in the ratio of 5:3:2. They decided to
table Lime into partnersjip from 1st April,2008. For the purpose. Goodwill is to be valued at 80% of the average annual
profits of the previous three or four years, whichever is higher.
The profits were: Rs.
Year ended 31st March , 20008 48,000
Year ended 31st March , 20007 30,000
Year ended 31st March , 20006 31,500
st
Year ended 31 March , 20005 45,000
Calculated the value of Goodwill.
Problem 4. A and B are partners sharing profits in the ratio of 3:2. Due to financial difficulties, they decided to admit Z
as partner from 1st, 2008 on the following terms:
Z will have given 25% share of the profit.
Goodwill of the firm will be valued at two years’s purchase of three years’ normal average profits of the firm.
The profits of the previous three years were as follows:
For the year ended 31st March, 2008— Profits Rs. 30,000 (after debiting loss of stock by fire Rs. 40,000).
For the year ended 31st March, 2007—Loss Rs. 80,000 (includes voluntary retirement compensation paid Rs. 1, 10,000).
For the year ended 31st March, 2006—Profit Rs. 1,05,000 (includes a profit of Rs. 25,000 on the sale of furniture).
You are required to value the Goodwill.

Problem 5. Ajit Baljit were sharing profits in the ratio of 3:2. They decided to admit Chaman into the partnership for
1/6th share of the future profits. Goodwill, valued at four times the average super profits of the firm, was Rs. 18,000. The
firm had assets worth Rs. 15 lakhs and liabilities Rs. 12 lakhs. The normal earning capacity of such firms is expected to be
10% p.a. Fin the Average Profits/Actual Profits earned bu the firm during the last four years.

Problem 6. On 1st April, 2008, an existing firm had assets of Rs. 75,000 including cash of Rs. 5,000. Is creditors amounted
to Rs. 5,000 on that date. The firm had Reserve Fund of Rs. 10,000 while Partners’ Capital Accounts showed a balance of
Rs. 6,000. If the normal rate of return is 20% and the Goodwill of the firm is valued at Rs. 24,000, at four years’ purchase
of super profit, find the average profits per year of the existing firm.

Problem 7. A firm earns a profit of Rs. 2,00,000. The Normal Rate of Return in a similar type of business is 10%. The
value of total assets (excluding Goodwill) and total outsiders’ liabilities as on the date of valuation of Goodwill are Rs. 22,
00,000 and Rs. 5,60,000respectively. Calculated the value of Goodwill according to Capitalization of Super Profit
Method.
Change in Profit –Sharing Ratio Among the Existing Partners

VERY SHORT ANSWER QUESTION (INCLUDING HOTS)

Q.1. What do you understand by Sacrificing Ratio?

Q.2. What do you understand by sacrificing Partners?
Q.3. What do you understand by Gaining Partners?
Q.4. What do you understand by Gaining Ratio?
Q.5.What do you mean by New Profit-Sharing Ratio?

PRATICAL PROBLEMS

Problem 1. X, Y and Z are sharing profits and losses I the ratio of 5:3:2. With effect from 1sst April, 2009 decided to
share future profits and losses equally. Calculated each partner’s gain or sacrifice due to the change in ratio.

Problem 2. P, Q and are partners sharing profits equally. They decided that in future, R will get 1/5 th share in profits. On
the date of change, firm’s goodwill is valued at Rs. 30,000.Give the Journal entries arising on account of change in the
profit-sharing ratio.

Problem 3. A, B and C were partners in affirm sharing profits in the ratio of 5:3:2. On1st January, 2005, they decided to
share the profits equally. It was also agreed that the change be carried out retrospectively for the last four years. The
profits for the last five years were as follows:

Year ended 2000 2001 2002 2003 2004

Profit (Rs.) 50,000 40,000 10,000 (Loss) 60,000 1,00,000

Pass the necessary adjustment entry.

Problem 4. A and B are partners in a firm sharing profits in the ratio of 3:2. On 31 st March, 2009, their Balance Sheet
showed a General Reserve of Rs. 54,000. On that date, they decided to admit C as new partners. The new profits-sharing
ratio between A, B and C will be 4:3:2. Record the necessary Journal entry in the books of the firm under the following
circumstance:
1. When they want to transfer the General Reserve in their Capital Accounts.
2. When they do not want to transfer General Reserve in their Capital Accounts and prefer to record an adjustment
entry for the same.

Problem 5. (Treatment of Workmen’s Compensation Reserve). A, and C sharing profits and losses in the ratio of 4:3:2,
decided to share future profits and losses in the ratio of 2:3:4 with effect from 1 st April, 2010. An extract of their Balance
Sheet as on 31st March, 2010 is as followings:
Liabilities Rs. Assets Rs.
Workmen’s Compensation Reserve 90,000

Show the accounting treatment under the following alternative cases:

Case I: If there is no other information.
Case II: If there is no claim.
Case III: If there is a claim of Rs 90,000.
Case IV: If a claim on account of Workmen’s Compensation is estimated at Rs. 45,000.
Case V: If a claim on account of Workmen’s Compensation is estimated at Rs. 99,000.

Problem 6. (Treatment of Investment Fluctuation Reserve). R, S and T are partners in a firm sharing profits and losses in
the ratio 2:2:1. Form 1st April, 2010, they agreed to share profits and losses in the ratio of 1:2:3. An extract of their
Balance Sheet as at 31st March, 2010 is as follows:
Liabilities Rs. Assets Rs.
Investment Fluctuation reserve 3,750 Investment (At Cost) 50,000

Show the accounting treatment under the following alternative cases:

Case I: If there is no further information given:
Case II: If the market value of investment is Rs. 50,000.
Case III: If the market value of investment is Rs. 47,500.
Case IV: If the market value of investment is Rs. 45,000.
Case V: If the market value of investment is Rs. 51,250.

Problem 7. X, Y and Z are sharing profits and losses in the ratio of 5:3:2. They decided to share future profits and losses
in the ratio of 2:3:5 with effect from 1st April, 2008. They also decided to record the effect of the following revaluations
without affecting the book value of the assets and liabilities by passing a single adjusting entry.
Book Figure (Rs.) Revised Figure (Rs.)
Land and Building 5, 00,000 5, 50,000
Plant and Machinery 2, 50,000 2, 40,000
Trade Creditors 60,000 55,000
Outstanding Expenses 60,000 75,000
Pass the necessary single adjusting entry.