Goodwill

Capitalized value is found by dividing average profit by normal rate. Rupees 600000 divided by fifteen percent gives rupees 4000000.

Goodwill is capitalized value minus actual capital employed. Rupees 4200000 minus rupees 2900000 is rupees 1300000.

The direct answer is option D: deduct the one-time legal compensation income from profit. Goodwill is based on normal and sustainable earning capacity, not on an exceptional receipt that is unlikely to occur again. Legal compensation received once is income in the reported accounts, but it is not ordinary operating income. Therefore, when adjusting past profit, begin with the reported profit and subtract the compensation amount. This gives a more realistic normal profit for goodwill valuation. Option D is correct because it removes the temporary income from profit. Option A is wrong because adding it to profit would make the exceptional income count twice or increase an already reported profit. Option B is wrong because the adjustment is made in the profit figure, not by deducting the receipt from partners’ capital. Option C is wrong because goodwill is calculated after adjusted profit is found; the compensation is not directly added to the goodwill balance. The reasoning is parallel to the abnormal-gain rule: abnormal gain is deducted, while abnormal loss is added back. The memory cue is “one-time income is taken out before averaging.” This answer assumes the compensation is genuinely non-recurring, as stated.

Abnormal loss gives a wrong lower picture of normal earning. So it is added back to calculate adjusted profit.

An expense that will not continue in future will not reduce maintainable profit. So if it was deducted from profit it may be added back.

The whole share of C is sacrificed by B and A sacrifices nothing. Therefore the sacrificing ratio is zero to one.

A’s old share was 7/10, whereas his new share is 3/5, or 6/10. Thus, A’s share decreases by 1/10, so A is the sacrificing partner. In contrast, B’s share increases from 3/10 to 4/10, making B the gaining partner. For exams, compare each partner’s new share with the old share: a decrease indicates sacrifice, while an increase indicates gain.

The new partner's premium equals his share in total goodwill. Three tenths of rupees 720000 is rupees 216000.

Unbrought goodwill is treated as recoverable from the new partner. Therefore his capital or current account is debited.

Premium is for partners who have given up profit share. Therefore sacrificing ratio must be used.

From the new partner's capital the inferred value of firm is rupees 1000000. Actual capital is rupees 900000 so goodwill is rupees 100000.

The inferred value is less than actual capital so positive goodwill does not arise. In such a case hidden goodwill is not taken.

If the retiring partner's share is taken equally then the gain is equal. Therefore the gaining ratio is one to one.

Continuing partners gain the retiring partner's share so they compensate him. Their capital accounts are debited.

The deceased partner's share of goodwill is part of his claim. Therefore his capital or representative account is credited.

A lower actual rate means the firm is not earning above normal return. Therefore super profit does not arise.

When capitalization rate falls the capitalized value of the same super profit rises. A fall from twenty to ten percent doubles the value.

The direct answer is option B: the weighted average profit method. The four profits show a clear rising trend: ₹1,50,000, ₹2,00,000, ₹2,50,000 and ₹3,00,000. In a rising business, the recent profit usually gives a better indication of the present and future earning capacity than an old profit. The weighted average method gives larger weights to recent years, so the latest profit affects the average more strongly. Option B is correct for this reason. Option A, simple average, gives every year equal importance; it can be used in suitable cases, but it is less responsive to a rapid upward trend. Option C, only net asset method, is not an average-profit method and values the business mainly through net assets rather than the stated profit trend. Option D, no average method, is wrong because an appropriate average method can be selected and the question specifically asks which is better. A simple illustration is to attach small weights to older years and larger weights to newer years, then divide the total weighted profit by the total weights. The exam cue is: rising profits favour weighted average; stable profits may suit simple average. The choice still assumes the profits are normal and comparable.

When profits rise giving lower weight to recent higher profit may reduce average. This can undervalue goodwill.

Weighted average profit is weighted total divided by total weights. Rupees 2700000 divided by nine gives rupees 300000.

Gain on sale of building may be an abnormal capital gain. Use maintainable business profit for goodwill.

The direct answer is option A: customer loyalty and reputation. Goodwill is an intangible advantage that helps a firm earn more than a similar firm without that advantage. A reliable customer list means customers are likely to return, while good service creates trust and a favourable reputation. These features can bring repeat sales, stable demand and sometimes the ability to charge a suitable price. Therefore they increase the firm’s future earning capacity and represent important causes of goodwill. Option A is correct. Option B, only bank deposit, is a financial asset and does not explain the firm’s special reputation or customer relationship; a bank balance is normally recorded separately. Option C, only shortage of capital, is a difficulty, not a source of goodwill. Lack of capital generally restricts operations and does not create customer trust. Option D, partners’ drawings, means amounts withdrawn by partners; drawings reduce the resources available to the business and are not a reason for goodwill. The concept is that goodwill is not merely cash or a physical object. It comes from advantages such as reputation, loyal customers, quality service, location and efficient management. The memory cue is: if customers choose the firm because of trust and service, think goodwill. Do not confuse an intangible business advantage with a bank balance or capital account.

Goodwill is linked with future earning capacity. If location change may reduce income it should be considered in valuation.

Income based on personal skill may reduce under a new owner or structure. So goodwill value should be taken carefully.

Goodwill is an intangible asset. When raised in books goodwill account is debited like an asset account.