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If a firm has a long term profitable government contract what effect may it have on goodwill?

Answer and explanation

Correct answer: 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.

Related tags

GoodwillFactorsGovernment ContractEarning CapacityPartnership Accounts Basic ConceptsAccountancyClass 12 Mcq

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