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If a firm's location is highly profitable but its lease is due to expire soon, what potential effect may this have on goodwill?

Answer and explanation

Correct answer: Location-based goodwill may decrease

The extra profit generated by a location depends on the lease term and the firm's ability to continue operating there. If the lease expires, the firm may have to relocate, which can reduce customers, sales and super profits; therefore, the location-based component of goodwill may decline. The other options are not direct consequences of goodwill valuation. Exam tip: While valuing goodwill, always assess the sustainability and continuity of the source of profit.

Related tags

GoodwillLocationLease RiskPartnership AccountsValuationPartnership Accounts Basic ConceptsAccountancyClass 12 Mcq

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