Goodwill

The direct answer is option C: ₹90,000. Under the super-profit method, goodwill equals super profit multiplied by the number of years’ purchase. Here, super profit is ₹45,000 and the years’ purchase is 2. Therefore, goodwill = ₹45,000 × 2 = ₹90,000. The words “years’ purchase” mean how many years of that special profit are being valued today. Option C is correct because it exactly matches the calculation. Option A, ₹45,000, is only the super profit itself; it would be the answer if the question asked for one year’s super profit, not two years’ goodwill. Option B, ₹22,500, is obtained by dividing ₹45,000 by 2, but division is not used here because the given number is the multiplier of years. Option D, ₹47,000, has no valid basis in the stated data and appears to result from an incorrect addition of ₹2,000. Remember that this method uses super profit, not total or average profit. The quick exam rule is: goodwill under super-profit method = super profit × years’ purchase. Always write the units and multiply before selecting the option.

Under the capitalization of super profit method, goodwill = super profit × 100 / normal rate of return. Therefore, goodwill = ₹50,000 × 100 / 20 = ₹2,50,000. Option C is only the amount of super profit, not the value of goodwill. Exam tip: You can also divide by the rate expressed as a decimal: ₹50,000 ÷ 0.20 = ₹2,50,000.

Under the capitalisation of average profit method, Capitalised Value = Average Profit × 100 ÷ Normal Rate of Return = ₹1,80,000 × 100 ÷ 12 = ₹15,00,000. Goodwill = Capitalised Value − Actual Capital Employed = ₹15,00,000 − ₹12,80,000 = ₹2,20,000. Therefore, option A is correct. Option B is the capitalised value, not the goodwill. Exam tip: Always subtract the actual capital employed from the capitalised value to calculate goodwill.

Average profit is the actual or expected average earning of the firm over the relevant years. Normal profit is the return that a similar firm is expected to earn on the capital employed under ordinary business conditions. When average profit is higher than normal profit, the firm is earning something extra because of advantages such as reputation, customer loyalty, efficient management, or a favourable location. This extra earning is called super profit. Therefore, option B is correct. The other choices do not follow: earning super profit does not mean that the firm has no assets, always suffers losses, or must have nil goodwill.

The reasoning is a direct comparison. If average profit is ₹80,000 and normal profit is ₹60,000, then super profit is ₹20,000, calculated as average profit minus normal profit. Thus, the important condition is average profit greater than normal profit. Super profit is also an important basis for valuing goodwill, because it shows the firm’s capacity to earn more than the ordinary return. The conclusion is therefore that the firm is earning super profit, exactly as stated in choice B.

The correct answer is B. Average profit for goodwill should represent normal, maintainable profit. Since the first reported profit of ₹110,000 includes an abnormal profit of ₹20,000, remove it: adjusted first-year profit = ₹110,000 − ₹20,000 = ₹90,000. The three normalised profits are therefore ₹90,000, ₹90,000 and ₹130,000. Their total is ₹310,000, so average profit = ₹310,000 ÷ 3 = ₹103,333.33 approximately. Option A uses the unadjusted first year. Option C ignores the third year and is not an average. Option D is the total, not the average. A useful cue is: abnormal gain is deducted when calculating maintainable average profit.

An abnormal loss is not part of the normal operating result, so it is added back to the reported profit. Thus, adjusted third-year profit = ₹92,000 + ₹12,000 = ₹1,04,000. ₹92,000 is the unadjusted profit and is therefore not correct. Exam tip: add back an abnormal loss while determining maintainable profit for goodwill.

For goodwill valuation, average profit should represent the profit that the business is reasonably expected to earn in the future. A regular expense that will continue every year must therefore be considered, even if it was not included in earlier years. Such an expense reduces future profit rather than increasing it.

The additional advertisement expense is ₹25,000 every year. Since it is a recurring future expense, the maintainable or adjusted average profit is reduced by ₹25,000. Hence option B is correct. It would be wrong to call the goodwill itself ₹25,000, because goodwill depends on methods such as average profit or super profit and also on the relevant valuation data.

A recurring future saving in insurance expense reduces the firm’s annual cost and increases profit by ₹18,000. Therefore, ₹18,000 is added to adjusted or maintainable profit for goodwill valuation. Option A is incorrect because it treats the saving as an increase in expense. Exam tip: Add permanent future increases in income or savings in expenses to maintainable profit.

The direct answer is option B: the one-time strike loss is treated as an abnormal loss and added back. Goodwill valuation tries to measure the firm’s normal and continuing earning capacity. An old strike that caused a single, unusual loss is not expected to occur regularly. If that loss remains in the past profit, the profit will look smaller than the firm’s normal earning ability. The steps are: identify the strike loss; decide that it is abnormal because it is one-time; add it back to the reported profit to obtain adjusted normal profit; then use the adjusted profit in the goodwill calculation. Option B is correct because adding back the abnormal loss removes its temporary effect. Option A is wrong because leaving it as a normal loss would understate maintainable profit and goodwill. Option C is wrong because the amount is not directly deducted from goodwill; it first adjusts the profit figure. Option D is wrong because a strike loss is not capital merely because it is unusual; it is a revenue loss for profit adjustment. The memory cue is: abnormal loss is added back, while abnormal gain is deducted, when finding normal profit. This rule applies only when the event is genuinely unusual and not a regular business cost.

When new share is sacrificed in old ratio the sacrificing ratio is the old ratio. Therefore (5:4) is correct.

Goodwill not brought in cash is treated as due from the new partner. Therefore the new partner's account is debited.

Hidden goodwill = implied total capital of the firm − actual adjusted capital. Therefore, ₹6,00,000 − ₹5,20,000 = ₹80,000, so option A is correct. ₹1,50,000 is the capital brought in by the incoming partner, not the amount of goodwill. Exam tip: first determine the implied total capital from the incoming partner’s capital and share, then subtract the actual adjusted capital.

The governing concept is writing off existing goodwill at the time of partnership reconstitution. When old goodwill is removed from the books, the partners’ capital or current accounts are debited in their old profit-sharing ratio. A and B share in the old ratio 2:1, so the total is 3 parts and B’s fraction is 1/3. B’s debit is therefore ₹1,50,000 × 1/3 = ₹50,000. Option B is correct. A’s corresponding debit would be ₹1,00,000, which is option A; option C is the entire goodwill balance and ignores the ratio; option D incorrectly assumes equal sharing. The total debits of A and B equal ₹1,50,000, fully writing off the old goodwill.

Private payment does not pass through the firm's bank or accounts. Therefore no entry is made in the firm's books.

Old partners are credited when goodwill is received and debited when withdrawn. Bank effect may also become nil finally.

C’s old profit-sharing fraction is \(2/9\), since the total ratio is \(4+3+2=9\). Therefore, C’s share of goodwill is \(₹2,70,000 \times \frac{2}{9}=₹60,000\). Option C incorrectly takes one-third of the total goodwill, which is greater than C’s actual share. Exam tip: Multiply the retiring partner’s old profit-sharing fraction by the total goodwill to find the partner’s goodwill share.

Continuing partners get a higher future profit share. Therefore they compensate the retiring partner for his goodwill share.

Retiring partner's goodwill share is (₹60000). Second continuing partner's share is (60000 \times \frac{2}{5}=₹24000).

Amount due to deceased partner is payable to his executor. Therefore goodwill share is credited to executor account.

Deceased partner's share is (450000 \times \frac{1}{10}=₹45000). It will be credited to executor account.

Gaining partners take more future profit. Therefore they compensate sacrificing partners and are debited.

Direct answer: Option A, A sacrifices. Convert the old ratio 5:3 into fractions: A has 5/8 and B has 3/8. The new ratio 1:1 gives each partner 1/2. Compare each share carefully. A changes from 5/8 to 1/2, and 5/8 is greater than 1/2, so A gives up 5/8 − 1/2 = 1/8. B changes from 3/8 to 1/2, so B receives an increase of 1/8 and gains. Therefore only A sacrifices, making option A correct. Option B is wrong because B’s share increases. Option C is wrong because both partners do not gain; one partner’s loss becomes the other’s gain. Option D is wrong because the shares clearly change. Memory cue: compare each partner’s old and new fraction, not just the written ratio numbers.

B’s old share is 2/5 and the new share is 3/7. Therefore, B’s gain = new share − old share = 3/7 − 2/5 = (15−14)/35 = 1/35. Hence, option A is correct. 1/7 is merely the difference between the numerators and is not the correct gain. In exams, calculate gain by subtracting the old share from the new share.

B's share increased from (1/5) to (2/5), so gain is (1/5). B is debited (200000 \times \frac{1}{5}=₹40000).

Goodwill is considered an asset of the old firm. Therefore it is credited to old partners in old ratio.