Goodwill

Divide super profit by capitalization rate. Rupees 90000 divided by twelve percent gives rupees 750000.

Insurance claim income is an abnormal, non-recurring income. Since it is not expected to arise regularly in the future, it must be deducted from the average profit to determine maintainable or adjusted profit for goodwill valuation. It is not transferred to the Capital Account. Exam tip: deduct abnormal or non-recurring income, but add back abnormal or non-recurring expenses.

A flood loss is abnormal and non-recurring, so it does not represent the normal operating performance of the business. Since the loss has already been deducted from the reported profit, ₹40,000 must be added back to the previous year’s profit before calculating the average profit. Deducting it again would result in a double adjustment. Exam tip: Add back abnormal expenses or losses, but deduct abnormal incomes while calculating normal profit.

Goodwill is based on future maintainable profit, so a known recurring change in future expenses must be considered. If annual rent increases by ₹30,000, annual profit will fall by the same amount, assuming no other change. Therefore ₹30,000 must be deducted from each relevant profit before calculating the average. Adding it would overstate maintainable profit, and transferring it to capital is unrelated to this adjustment.

The direct answer is option A: the discontinued salary should be added back. Adjusted or maintainable profit should show the profit that can continue in future. The old profit had already been reduced by the partner’s salary. If that salary will stop in future, it will no longer be a future expense. Therefore the old deduction must be reversed by adding the salary back to profit. Option A is correct. Option B is wrong because deducting it again would reduce profit twice, even though the expense has ended. Option C is wrong because salary is an expense adjustment, not goodwill. Option D is wrong because a stopped salary is not a liability; it is simply no longer payable. For example, if reported profit is ₹100,000 after salary of ₹20,000, adjusted profit becomes ₹100,000 + ₹20,000 = ₹120,000. Memory cue: a non-recurring expense is added back; a future expense is deducted.

The weighted-average method gives greater importance to the years assigned greater weights. Multiply each profit by its weight: ₹240000×1 = ₹240000, ₹300000×2 = ₹600000 and ₹420000×3 = ₹1260000. The weighted total is therefore ₹240000+₹600000+₹1260000 = ₹2100000. The sum of weights is 1+2+3 = 6. Dividing gives weighted average profit = ₹2100000÷6 = ₹350000. Thus option A is correct. Option C is merely the latest profit, option D is the earliest profit, and option B is an incorrect average that does not apply the stated weights. The calculation is relevant to goodwill valuation.

In declining profits the recent profit gives a better indication of future. Therefore the recent year should receive higher weight.

Income from non trading investment is not normal business earning. Hence it is removed from adjusted profit.

Normal profit is calculated on capital used in business. Including non trading assets can make normal profit wrong.

Sacrificing ratio = old profit share − new profit share. A sacrifices the entire \(\frac{2}{7}\) share given to C, while B sacrifices nothing. Therefore, the ratio is \(\frac{2}{7}:0 = 1:0\). Exam tip: If the incoming partner’s entire share is obtained from only one old partner, the sacrificing ratio is 1:0.

Under the old ratio, B’s share was \(1/3\), while under the new ratio it becomes \(1/2\). Thus, B gains \(1/2-1/3=1/6\), whereas A sacrifices a share. In the examination, compare each partner’s new share with the old share to identify the gaining or sacrificing partner.

A is a gaining partner because the new share is greater than the old share: 7/10 − 3/5 = 7/10 − 6/10 = 1/10. In a goodwill adjustment, A compensates the sacrificing partners for this gain.

Compensation equals the sacrificed share of total goodwill. One fourteenth of rupees 840000 is rupees 60000.

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

The direct answer is option A: the second old partner receives ₹50,000. The new partner brings a goodwill premium of ₹150,000. The old partners’ sacrificing ratio is 2:1, so the total number of parts is 3. The second partner has 1 part, or 1/3 of the premium. Calculation: ₹150,000 × 1/3 = ₹50,000. This amount is credited to the second old partner because the old partners are sacrificing part of their profit share for the new partner. Option A is correct. Option B, ₹100,000, is 2/3 and belongs to the first old partner. Option C, ₹150,000, gives the entire premium to the second partner and ignores the ratio. Option D, ₹75,000, assumes an equal division into two parts, which is not the stated ratio. Always divide goodwill premium according to the sacrificing ratio: first partner 2/3, second partner 1/3.

Goodwill premium is compensation to old partners. Even if it remains in the firm they are credited.

The withdrawal is made by old partners. Therefore their capital accounts are debited and bank decreases.

The new partner's capital implies firm value of rupees 1200000. Actual total capital is rupees 1000000 so the difference is rupees 200000.

Goodwill arises only when there is excess value. If inferred and actual values are equal goodwill is nil.

Existing goodwill is written off in old ratio. The second partner's share is three sevenths which is rupees 90000.

Goodwill is an intangible asset. An asset account is credited when the asset is reduced or removed from the books; therefore, the existing goodwill account is credited on write-off. The partners’ capital accounts are generally debited, so the entry does not represent cash received or an increase in sales. Exam tip: debit an asset when it increases and credit it when it decreases or is written off.

When goodwill is raised the existing partners' rights are taken in their old profit ratio. Follow any special instruction if given.

Credit in old ratio and debit in new ratio benefits the sacrificing partner. This is the effect of goodwill adjustment.

The retiring partner receives his share in total goodwill. One fifth of rupees 600000 is rupees 120000.

Continuing partners bear goodwill burden in the ratio in which they gain. Therefore the ratio is three to two.