Goodwill

Correct answer: A. Nil

Direct answer: Option A, nil. When goodwill is raised, the Goodwill Account is debited because goodwill is recorded as an asset, and the partners’ capital accounts are credited in the old ratio. When it is written off, the partners’ capital accounts are debited in the new ratio and the Goodwill Account is credited for the full amount. Thus the Goodwill Account has equal debit and credit totals and closes with no balance. Option A is correct. Option B is wrong because no debit amount remains after the full goodwill is written off. Option C is wrong for the same reason: no credit balance remains. Option D is wrong because bank balance is a separate account and is not the final balance of goodwill. The new ratio affects the partners’ accounts, but complete write-off makes the goodwill account nil. Memory cue: an account fully written off has zero closing balance.

Correct answer: B. Credit A (₹30000)

Direct answer: Option B, Credit A ₹30,000. A’s old share is 2/3, so when goodwill is raised A is credited ₹90,000 × 2/3 = ₹60,000. A’s new share is 1/3, so when goodwill is written off A is debited ₹90,000 × 1/3 = ₹30,000. Net effect = ₹60,000 credit − ₹30,000 debit = ₹30,000 credit. Therefore option B is correct. Option A gives the correct amount but the wrong direction. Option C is wrong because the credit and debit are not equal. Option D wrongly credits A with the entire goodwill and ignores the partnership ratios. The old ratio is used for raising goodwill, while the new ratio is used for writing it off. Exam cue: calculate two separate amounts before finding the net effect.

Correct answer: A. Super profit method

Super profit requires normal profit. Normal profit is calculated by applying normal rate on capital employed.

Correct answer: C. Negative (₹16000) or may be treated as nil

Average profit is less than normal profit, so there is no excess profit. In goodwill questions it may generally be treated as nil super profit.

Correct answer: B. It can increase goodwill

The direct answer is option B: a well-known brand identity can increase goodwill. Goodwill is the value of advantages that help a firm earn better profits than an ordinary firm. A trusted and familiar brand can attract customers, encourage repeat purchases and support higher sales. These benefits can raise the firm’s earning capacity, so goodwill may increase. Option B is correct because it states a possible positive effect, not an automatic guaranteed amount. Option A is wrong because strong customer recognition normally supports, rather than reduces, goodwill. Option C is wrong because goodwill is an intangible asset or business advantage, not a liability merely because the brand is famous. Option D is wrong because goodwill is not automatically converted into cash; it remains a non-physical business value unless a transaction occurs. Remember: trust, reputation, loyal customers and a strong brand are common sources of goodwill.

Correct answer: B. Goodwill may decrease

Poor customer service can reduce customer trust and satisfaction, harming the business’s reputation and lowering its goodwill. Therefore, option B is correct. Option C is incorrect because customer experience is an important factor affecting goodwill. Exam tip: goodwill is an intangible asset, not a liability.

Correct answer: A. Because only the owners’ net capital invested is needed

Capital employed represents the net funds actually invested in and used by the business. When the total assets figure is used, it includes resources financed not only by the owners but also by outsiders such as creditors and lenders. Those outside claims must be deducted to find the portion attributable to the owners’ capital: Capital employed = Total assets − Outside liabilities. For example, if assets are ₹10,00,000 and outside liabilities are ₹3,00,000, capital employed is ₹7,00,000. Therefore option A is correct. Liabilities are not profit, assets may include non-cash items, and goodwill is an intangible asset rather than always a liability.

Correct answer: B. ₹5,80,000

Capital employed = Total assets − Outside liabilities. Therefore, ₹8,40,000 − ₹2,60,000 = ₹5,80,000, so option B is correct. In such questions, outside liabilities are deducted from total assets; adding them would give an incorrect figure.

Correct answer: A. ₹1,50,000

Purchased goodwill = Purchase price − Net assets. Therefore, ₹8,50,000 − ₹7,00,000 = ₹1,50,000, so option A is correct. Option B represents only the value of net assets, not goodwill. Exam tip: when the purchase price exceeds the net assets, the difference is recognised as purchased goodwill.

Correct answer: A. Because goodwill is based on future earning capacity

Goodwill value is linked with future regular profit. Therefore sustainable profit after removing abnormal items is used.

Correct answer: B. Only B

Goodwill is received by the sacrificing partner. Here B alone sacrifices, so premium goes to B.

Correct answer: A. ₹15,000

The firm receives ₹40,000 in cash as the goodwill premium, and the old partners withdraw ₹25,000. Therefore, cash remaining in the firm = ₹40,000 − ₹25,000 = ₹15,000. ₹25,000 is the amount withdrawn, whereas ₹40,000 is the initial receipt. Exam tip: subtract the amount withdrawn from the cash received.

Correct answer: A. When adjustment is to be made through capital accounts without cash

Internal adjustment does not involve cash movement. Gaining partners are debited and sacrificing partners are credited.

Correct answer: A. Number of years for which profit is treated as purchased

Years purchase shows for how many years average or super profit is capitalized. It is multiplied by the profit.

Correct answer: A. Goodwill may decrease

Under the capitalization method, the capitalized value of maintainable profits is calculated as: Average profit × 100 ÷ Normal rate of return. If average profit and actual capital employed remain unchanged, an increase in the normal rate makes the denominator larger, so the capitalized value falls. Goodwill under the capitalization-of-average-profit approach is generally the capitalized value minus actual capital employed; therefore goodwill will decrease, or may become lower, when the rate rises. Option A is correct. It is not necessarily unchanged, it does not always increase, and a higher rate does not convert goodwill into a liability. The exact fall depends on the figures.

Correct answer: A. ₹65,000

Weighted average profit = total weighted profit ÷ total weight. Therefore, ₹7,80,000 ÷ 12 = ₹65,000, so option A is correct. Option B is the total weighted profit, not its average. Exam tip: always divide the total of weighted amounts by the sum of the weights.

Correct answer: A. ₹1,50,000

A weighted average gives greater influence to values with larger weights. It is different from an ordinary average because every profit is counted according to the importance assigned to it. The required result is therefore obtained by multiplying each profit by its weight, adding those products, and dividing by the total of the weights. This method is useful when recent years or selected observations are deliberately given unequal importance.

The weighted products are ₹90,000 × 1 = ₹90,000, ₹1,20,000 × 2 = ₹2,40,000, ₹1,50,000 × 3 = ₹4,50,000, and ₹1,80,000 × 4 = ₹7,20,000. Their total is ₹15,00,000, while the weights total 10. Thus weighted average profit is ₹15,00,000 ÷ 10 = ₹1,50,000. Therefore, option A is correct; ₹7,20,000 is only one product, not the average.

Correct answer: A. ₹2,09,000

The governing concept is the weighted average, calculated as the sum of each observation multiplied by its weight, divided by the sum of all weights. The products are ₹1,20,000×1 = ₹1,20,000; ₹1,50,000×2 = ₹3,00,000; ₹2,10,000×3 = ₹6,30,000; and ₹2,60,000×4 = ₹10,40,000. Their total is ₹20,90,000. The total weight is 1 + 2 + 3 + 4 = 10. Therefore, weighted average profit = ₹20,90,000 ÷ 10 = ₹2,09,000, so option A is correct. Option B is not an average, option C results from incorrect weighting, and option D reflects an arithmetic error. The largest weight correctly gives the largest profit the greatest influence.

Correct answer: C. Sixteen percent

The governing concept is the actual rate of return, calculated by dividing average profit by capital employed and multiplying the result by 100. Here, average profit is ₹8,00,000 and capital is ₹50,00,000. Therefore, actual rate of return = (₹8,00,000 ÷ ₹50,00,000) × 100 = 0.16 × 100 = 16%. Hence option C, sixteen percent, is correct. A rate of 12% would imply profit of only ₹6,00,000 on the same capital, while 14% would not follow from the given figures. A rate of 20% would require ₹10,00,000 profit. Both amounts must be expressed in the same units before division, although the common lakh unit already makes the calculation straightforward.

Correct answer: B. Normal profit will decrease

Normal profit is calculated by applying the normal rate of return to capital employed: normal profit = capital employed × normal rate of return. Since capital employed remains constant, a fall in the rate directly reduces the calculated normal profit. Average profit remaining unchanged does not alter this conclusion; it is used separately when determining super profit by comparing actual or maintainable profit with normal profit. Therefore option B is correct. Option A reverses the effect, option C ignores the multiplication relationship, and option D confuses normal profit with goodwill, which is an intangible business value rather than a profit figure.

Correct answer: A. Goodwill may increase

Goodwill represents the value of advantages that enable a firm to earn profits above the normal return. A long-term profitable government contract can provide stable orders, predictable revenue and stronger future earning capacity. These advantages may increase expected future maintainable profits and therefore may raise the value of goodwill. Hence option A is the best answer. The word “may” is important because the actual effect depends on profitability, enforceability, duration, competition and other business conditions. Goodwill does not automatically end or become a liability, and saying there is no possible effect ignores the contract’s potential economic benefit.

Correct answer: A. It is linked with capacity to earn more than normal profit in future

Goodwill is an intangible asset representing the favourable reputation and other advantages that enable a business to earn profits above the normal return expected from similar firms. Its value arises from factors such as customer loyalty, efficient management, location, product quality and skilled employees. Therefore, option A correctly connects goodwill with the future capacity to earn supernormal or excess profits. Option B confuses an intangible business advantage with a cash balance. Option C is incorrect because goodwill is an asset, not an outside liability. Option D is also wrong because drawings are withdrawals by partners and do not create goodwill.