Goodwill

Old partners receive goodwill in the ratio in which they sacrifice share. Therefore sacrificing ratio is used.

Direct answer: Option A, old share minus new share. The sacrificing ratio measures how much of an old partner’s profit share is given up for a new partner. For each partner, calculate the old fraction and the new fraction, then use: Sacrifice = Old share − New share. If the result is positive, that partner sacrifices; if it is negative, the partner gains. Option A is therefore correct. Option B, new share minus old share, gives the reverse sign and is used to identify gain, not the standard sacrificing formula. Option C, capital minus goodwill, compares money figures and does not measure a profit-sharing change. Option D, goodwill minus capital, is also unrelated to a ratio of shares. A common mistake is to subtract the ratios without first converting them into comparable fractions. Exam cue: old minus new means the old partner’s share has reduced.

Sacrificing share = old share − new share. Therefore, \(\frac{3}{5}-\frac{1}{2}=\frac{6-5}{10}=\frac{1}{10}\). The option \(\frac{1}{5}\) is incorrect because the fractions must first be converted to a common denominator before subtraction. Exam tip: For a partner’s sacrifice, use the formula old share − new share.

Goodwill brought by a new partner is credited to the old partners in their sacrificing ratio. A's share is \(\frac{4}{4+1}=\frac{4}{5}\). Therefore, A receives \(₹50,000 \times \frac{4}{5}=₹40,000\). ₹10,000 is B's share because B has 1 part in the ratio. Exam tip: First add the ratio parts, then multiply the total goodwill by the relevant partner's fraction.

If old partners sacrifice in old ratio the sacrificing ratio is the same old ratio. Here it is 7:3.

The retiring partner has contributed to creating goodwill. Therefore he gets compensation for his share.

On retirement remaining partners gain profit share. Therefore they bear goodwill in gaining ratio.

Since the gaining ratio is 3:2, B’s share is 3 out of a total of 5 parts. Therefore, B’s share = ₹75,000 × 3/5 = ₹45,000. ₹30,000 is C’s share, not B’s. Exam tip: To calculate a partner’s share in a gaining ratio, divide that partner’s ratio by the total ratio and multiply by the amount.

The direct answer is option A: the deceased partner’s capital account. Goodwill is the value of a firm’s good name, customer trust and extra earning ability. When a partner dies, the partner is entitled to his or her share of the goodwill earned up to the date of death. This entitlement is recorded on the credit side of the deceased partner’s capital account, because the amount increases what the firm owes to that partner’s estate. The exact reasoning is: first determine the deceased partner’s share of goodwill; next calculate the necessary adjustment among the continuing partners according to the applicable profit-sharing or gaining ratio; finally credit the deceased partner’s capital account with that share. Option A is correct because the capital account records the amount payable to the deceased partner. Option B is wrong because cash is used only when money is actually paid or received; the goodwill adjustment itself is not necessarily a cash transaction. Option C is wrong because purchases account records goods bought for resale, not goodwill. Option D is wrong because a bank loan account records borrowed money and repayment, not a partner’s goodwill entitlement. A useful exam cue is: on a partner’s death, goodwill due to that partner is credited to the deceased partner’s capital account, while the partners who gain are adjusted through their accounts.

Existing goodwill belongs to old partners. Therefore it is written off in old profit sharing ratio.

If cash is not brought goodwill is adjusted through capital accounts. Old partners are credited in sacrificing ratio.

Abnormal profit does not represent the normal and recurring earning capacity of the business. Therefore, it is deducted from the actual profit to arrive at adjusted profit before calculating average profit. In contrast, abnormal loss is added back while determining normal profit. Exam tip: Average Profit = Sum of adjusted profits ÷ Number of years.

Abnormal loss does not arise from the normal and regular operations of the business. Therefore, it is added back to the current profit while calculating maintainable profit, so that the normal earning capacity is determined. In contrast, abnormal profit is deducted. Exam tip: Add abnormal loss and deduct abnormal profit.

After deducting abnormal profit third year's correct profit is ₹60000. Total is ₹160000 and average is about ₹53333.

Adding back abnormal loss makes first year's correct profit ₹32000. Total is ₹89000 and average is about ₹29667.

Goodwill valuation should be based on the maintainable profit that the business is expected to earn in the future. If an expense recorded in a past year will not recur, it has reduced the reported past profit but will not reduce future earning capacity. Therefore, while adjusting that past profit, the non-recurring expense is added back. For example, if reported profit is ₹80,000 after a one-time expense of ₹10,000, adjusted profit becomes ₹90,000. Hence option A is correct. Option B would understate maintainable profit, option C incorrectly changes capital, and option D describes a banking action rather than a profit adjustment.

If the additional income is reasonably expected to be received regularly in the future, it increases the business’s maintainable earning capacity. Therefore, it is added while calculating maintainable profit. Option B is incorrect because a future recurring reduction or additional expense would be deducted. Exam tip: Adjust only items that are recurring and expected to continue; do not treat one-time income as maintainable income.

Goodwill is the monetary value of a firm's reputation, customer loyalty and other advantages that enable it to earn profits above the normal level. Therefore, option A is correct. It is not cash, an amount always payable, or partners' drawings. Exam tip: Associate goodwill with the capacity to earn super profits.

Goodwill is associated with a business’s reputation, customer loyalty, and ability to earn higher future profits. A decrease in the number of customers may reduce sales and future profits, causing goodwill to decline. Efficient management, a good location, and honest dealings generally increase goodwill instead. Exam tip: A factor that harms reputation or future earning capacity can reduce goodwill.

A good business location is convenient for customers and can attract more of them. This may increase sales, earning capacity and the reputation of the business, thereby increasing its goodwill. Therefore, option A is correct; a good location neither converts goodwill into a liability nor always eliminates it. Exam tip: Remember location, quality, management and customer trust as important factors affecting goodwill.

The positive difference between capitalized value and actual capital is goodwill. This is the main idea of capitalization method.

A sacrificing ratio of 2:1 means that the goodwill is divided into 3 total parts, of which the second old partner receives 1 part. Therefore, his share is ₹36,000 × 1/3 = ₹12,000. ₹24,000 is the first partner’s 2/3 share. Exam tip: Divide the goodwill by the total parts of the sacrificing ratio and multiply by the concerned partner’s share.

The first useful step in a goodwill problem is to identify the valuation method and the ratio or basis specified in the question. Common methods include average profit, super profit, capitalization, and annuity methods; each requires a different formula. A ratio may refer to a profit-sharing, sacrificing, or gaining ratio, and it determines how an amount is allocated among partners. Therefore, option A is correct. The colour of options and page number have no accounting relevance. Partners’ ages may occasionally appear in a narrative but do not by themselves select a goodwill formula. Reading the method, figures, units, and required ratio before calculating prevents formula and allocation errors.

When a firm consistently earns more than its normal profit, it demonstrates an ability to earn super profit. This additional earning capacity is a major basis of the firm's goodwill. Therefore, option A is correct; higher profit does not mean that the firm's assets are exhausted or that it will close down. Exam tip: profit earned above normal profit is called super profit and is associated with goodwill.

When cash is not brought goodwill is adjusted through capital accounts. Old partners are credited in sacrificing ratio.