Goodwill

The sacrificing partner receives compensation for loss of future profit share. Therefore his capital account is credited.

Extra earning is super profit and capitalizing it gives goodwill. This method focuses more on earning capacity.

The direct answer is option A: ₹3,00,000. An abnormal gain is a one-time or unusual income that should not be treated as part of normal, maintainable profit. The last reported profit is ₹6,00,000, and it includes an abnormal gain of ₹3,00,000. To remove that unusual income, subtract it: adjusted last-year profit = ₹6,00,000 − ₹3,00,000 = ₹3,00,000. Option A is correct. Option B, ₹6,00,000, leaves the abnormal gain inside the profit and therefore overstates normal earning capacity. Option C, ₹9,00,000, adds the abnormal gain again, which makes the error even larger. Option D, ₹1,00,000, is not obtained from the given adjustment and has no stated basis. The purpose of adjustment is to make all past profits comparable and normal before calculating average profit or goodwill. Notice the opposite rule: an abnormal loss is added back, but an abnormal gain is deducted. The exam memory line is “unusual income out, unusual loss back in.” Always check whether the exceptional item is already included in the reported profit before adjusting it.

An abnormal loss is not a normal operating item. Since the loss of ₹20,000 has already been deducted from the book profit, it must be added back: ₹1,40,000 + ₹20,000 = ₹1,60,000. Exam tip: Add abnormal losses and deduct abnormal gains while calculating adjusted profit.

Remuneration is like a regular cost and affects future earning. Hence adjusted profit gives a better base.

In average profit method average profit is multiplied by years purchase. The question gives the same clue.

Increased competition may reduce a firm’s super profits and its expected future earning capacity. Since goodwill is associated with the ability to earn profits above the normal level, goodwill generally tends to decrease when competition rises. Option C is incorrect because competition can affect profitability and goodwill, while B and D are exaggerated or conceptually wrong. Exam tip: In questions on factors affecting goodwill, increased competition generally has a negative effect.

Good location attracts customers and may improve earning capacity. So it is an important factor of goodwill.

Goodwill represents the capacity to earn extra profit in future. Past income only helps in estimation.

Average profit is less than normal profit so no super profit arises. In this method goodwill depends on extra profit.

Goodwill equals average profit multiplied by years purchase. Rupees 300000 multiplied by 2.5 gives rupees 750000.

Rupees 80000 divided in ratio three to one gives three fourth to the first partner. Therefore he receives rupees 60000.

Rupees 80000 divided in ratio three to two gives three fifth to the first partner. Hence his burden is rupees 48000.

The deceased partners representative is compensated for his share of goodwill. This adjustment arises because continuing partners gain.

Goodwill valuation is based on maintainable future profit, not merely the profit reported in a past year. A normal manager’s salary is a recurring business expense that will continue in future periods. If it was omitted from a past year’s accounts, or if the question asks for adjusted profit, that salary must be deducted from average profit to arrive at maintainable profit. Therefore option A is correct. A past fire loss is normally abnormal and may be added back, an abnormal gain on sale of an old machine is removed from past profit rather than treated as a continuing expense, and a one-time insurance claim is non-recurring income that is excluded. Only the manager’s normal salary is a continuing cost here.

Capitalizing the same super profit at a lower rate increases the value. Rate and capitalized value have an inverse relation.

Normal profit is calculated on capital employed at a given rate. When capital increases normal profit increases.

One year's abnormal profit does not show future maintainable capacity. In exams adjust abnormal items.

Even if cash is not brought the new partner can be charged for goodwill. Old partners are credited in sacrificing ratio.

Higher years purchase shows greater confidence in maintainable future earning. This increases the value of goodwill.

Normal profit is twelve percent of rupees 1500000 which is rupees 180000. Deducting it from rupees 400000 gives super profit of rupees 220000.

First deduct abnormal gain to get adjusted profit of rupees 230000. Then deduct normal profit to get super profit of rupees 80000.

A's share rises from seven twelfths to two thirds so A gains. B's share falls from five twelfths to one third so B sacrifices.

The new partner's goodwill premium equals his share in total goodwill. One fifth of rupees 300000 is rupees 60000.

Super profit is rupees 180000. Multiplying it by two and a half gives goodwill of rupees 450000.