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Class 12AccountancyPartnership Accounts - Basic ConceptsGoodwillExpert
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The average profit is ₹1,75,000 and the normal profit is ₹1,25,000. Under the capitalisation of super profit method, the normal rate of return is 10%. What is the goodwill of the firm?

Answer and explanation

Correct answer: ₹5,00,000

Super profit = Average Profit − Normal Profit = ₹1,75,000 − ₹1,25,000 = ₹50,000. Under the capitalisation of super profit method, Goodwill = Super Profit ÷ Normal Rate of Return = ₹50,000 ÷ 10% = ₹5,00,000. Option B is only the super profit, not the goodwill. Exam tip: divide by the rate expressed as a percentage, or equivalently multiply by 100 and divide by the rate number.

Related tags

GoodwillSuper ProfitCapitalisation MethodPartnership AccountsPartnership Accounts Basic ConceptsAccountancyClass 12 Mcq
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10 more MCQs
  1. 1What is the basic meaning of goodwill in partnership?
  2. 2How is goodwill classified as an asset in accounting?
  3. 3What effect does a firm's good reputation have on its goodwill?
  4. 4Why is a stable customer base important for goodwill?
  5. 5What is the accounting treatment of purchased goodwill?
  6. 6Why is self generated goodwill generally not recorded in books?
  7. 7How is goodwill calculated under average profit method?
  8. 8The average profit is ₹50,000, and goodwill is valued at two years’ purchase. What is the value of goodwill?
  9. 9The profits for the last three years are ₹30,000, ₹45,000 and ₹60,000, respectively. What is the average profit used for calculating goodwill?
  10. 10The average profit for four years is ₹80,000, and goodwill is valued at three years’ purchase. What will be the value of goodwill?
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