Goodwill

At retirement goodwill burden is borne in gaining ratio. Take new ratio only when it is the actual gain.

The deceased partner's claim is based on his profit share before death. Therefore old profit ratio is used.

The governing concept is maintainable profit: goodwill depends on the future earning capacity that can reasonably continue, not merely on an unusual past performance. Fashion-driven demand may disappear when consumer preferences change, so the valuer should separate temporary or abnormal profit from sustainable profit and use a cautious estimate of future maintainable earnings. Therefore, option A is correct. Doubling past sales, as suggested in B, has no accounting basis. Option C incorrectly removes normal profit, while D confuses goodwill valuation with the measurement of capital. Careful normalization prevents temporary popularity from inflating goodwill.

Special technical know-how may give a firm an advantage over competitors and enable it to earn super profits. The capacity to earn profits above the normal level is a major basis of goodwill. An outside liability, drawings and an outstanding expense represent a liability, an amount withdrawn by the owner, and an unpaid expense respectively; none represents the capacity to earn extra profits. Exam tip: associate goodwill with the future earning capacity and super-profit potential of a firm.

Goodwill represents the value of advantages that help a firm earn better profits in the future. Customer loyalty is one such advantage, so strong loyalty should not be ignored merely because one year’s profit is low. An abnormal expense is unusual or non-recurring and does not represent the firm’s normal earning capacity. If it has reduced the reported profit, that expense should first be removed or added back while finding adjusted profit. Therefore option A is correct.

For example, suppose reported profit is ₹90,000 and it includes an abnormal expense of ₹10,000. The adjusted profit for goodwill purposes will be ₹100,000, assuming there are no other adjustments. The adjusted profits of the relevant years can then be averaged or used under the method specified in the question. Treating goodwill as nil would wrongly ignore customer loyalty, while making customers debtors or reducing capital has no connection with correcting profit. Thus adjustment of profit for the abnormal expense must come first.

Capitalizing the same profit at a higher rate reduces the value. Rate and capitalized value have an inverse relation.

Super profit means the amount by which average profit is greater than normal profit. Normal profit is calculated on capital employed at the normal rate of return. Thus, when capital employed falls and the rate remains unchanged, normal profit also falls, while average profit is given as unchanged. The gap between average profit and normal profit can therefore become larger. This is why the suitable answer is that super profit may increase.

The word “may” is important because the exact change depends on the normal rate and the amounts involved. It will not automatically become zero or necessarily decrease. For example, if average profit is ₹50,000 and normal profit falls from ₹30,000 to ₹20,000, super profit rises from ₹20,000 to ₹30,000. Hence option A follows from the formula: Super Profit = Average Profit − Normal Profit.

Actual rate is found by dividing profit by capital. Rupees 375000 is fifteen percent of rupees 2500000.

Return above normal rate shows capacity to earn extra profit. This indicates positive goodwill.

Goodwill is related to total profit earning capacity. Looking only at cash sales does not show full earning potential.

Expiry of license can reduce future earning. Therefore maintainable income must be estimated cautiously.

The extra profit generated by a location depends on the lease term and the firm's ability to continue operating there. If the lease expires, the firm may have to relocate, which can reduce customers, sales and super profits; therefore, the location-based component of goodwill may decline. The other options are not direct consequences of goodwill valuation. Exam tip: While valuing goodwill, always assess the sustainability and continuity of the source of profit.

The governing principle is that the partnership agreement, or a specific instruction in the question, determines the treatment when it expressly provides a method. Although goodwill compensation on admission is commonly adjusted in the sacrificing ratio, that general rule cannot override a clear agreement requiring equal sharing among the old partners. Thus option A is correct: the amount is divided equally, subject to the exact accounting entry required by the facts. Option B is only the usual default when no special instruction exists. Option C uses the wrong basis, and D ignores an adjustment that the agreement specifically requires.

The governing concept is the fixed capital system. Under this system, partners' capital accounts remain unchanged unless the partnership specifically decides otherwise; routine items such as goodwill adjustments, drawings, interest, and profit shares are recorded in current accounts. Consequently, option A is correct: the goodwill adjustment is made without altering the fixed capital balances. Option B concerns banking and has no connection with the posting rule. Option C incorrectly describes goodwill, which is an intangible business value rather than automatically a liability. Option D is unrelated to the use of current accounts.

The gaining partner compensates others so he should be debited. Crediting him reverses the adjustment.

A sacrificing partner receives compensation. Therefore his capital or current account should be credited.

Abnormal gain is not part of the business’s normal recurring earnings, so it must be deducted while calculating average profit. If it is not deducted, average profit will be overstated, and goodwill calculated by capitalising or multiplying average profit will also be overvalued. Option B is incorrect because the omission increases, rather than decreases, the reported profit. Exam tip: deduct abnormal gains and add abnormal losses while determining maintainable average profit.

The governing concept is the adjustment of historical profit to determine maintainable profit. An abnormal loss is not expected to recur under normal operations. It has reduced the reported profit temporarily, so it should be added back before finding average or maintainable profit. If the student fails to add it back, the adjusted profit remains understated. Since goodwill is commonly related to maintainable profit or super profit, the lower profit produces a lower goodwill figure. Therefore option A is correct. B gives the opposite effect, while C and D have no logical connection with the omitted adjustment.

The governing concept is method selection in goodwill valuation. The capitalization method and the average profit method are different techniques: capitalization may capitalize average or maintainable profit, whereas the average profit method applies an agreed number of years' purchase to average profit. They can produce different values because their formulas and assumptions differ. Therefore, using the average profit method when the question specifically requires capitalization is a failure to follow the stated instruction, making option A correct. It is not automatically easier, does not guarantee the same goodwill, and does not eliminate the need to understand normal or maintainable profit.

The governing concept is capitalization of average profit. Capitalized value of the business is found by dividing average profit by the normal rate of return expressed as a decimal: ₹1,50,000 ÷ 0.12 = ₹12,50,000. Goodwill is the excess of capitalized value over the actual capital employed, so goodwill = ₹12,50,000 − ₹10,00,000 = ₹2,50,000. Thus option B is correct. Option A is the capitalized value of profit at 120%, not the goodwill. Option C and option D do not result from subtracting actual capital from the capitalized business value and therefore use an incorrect formula.