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If a firm possesses special technical know-how that enables it to earn more than normal profits, the know-how can become a basis for creating which asset?

Answer and explanation

Correct answer: 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 An outside liability, drawings and an outstanding expense represent a liability, an amount withdrawn by the owner, and an unpaid expense respectively; none represents the capacity to earn extra profits.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.

Related tags

GoodwillTechnical-KnowhowSuper-ProfitPartnership-AccountsPartnership Accounts Basic ConceptsAccountancyClass 12 Mcq

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