Goodwill Accounting

Correct answer: A. Difference between capitalised value and actual capital

Under capitalization method, capitalised value is based on earnings. Difference from actual capital may be goodwill.

Correct answer: A. (₹40000)

Under the capitalisation method, goodwill is found by comparing the capitalised value of the business with the actual capital employed. Capitalised value represents the total capital indicated by the maintainable profit and the normal rate of return. If this value is greater than the actual capital, the excess represents the value of goodwill. The formula is: Goodwill = Capitalised Value − Actual Capital.

Here, the capitalised value is ₹3,00,000 and the actual capital is ₹2,60,000. Therefore, goodwill = ₹3,00,000 − ₹2,60,000 = ₹40,000. The answer is option A. Adding the two amounts would not measure goodwill, and using either amount alone would ignore the difference that represents the firm’s favourable reputation, customer relations, and earning advantage. The supplied calculation and answer are consequently correct.

Correct answer: A. When new partner's capital and profit share are given

Using new partner's capital and share, estimated total capital is found. This may show hidden goodwill.

Correct answer: A. (₹150000)

The correct answer is option A: ₹150,000. The new partner’s capital of ₹30,000 represents a 1/5 share of the estimated total capital. Let total capital be T. Then T × 1/5 = ₹30,000. Multiply both sides by 5: T = ₹30,000 × 5 = ₹150,000. Equivalently, divide the contributed amount by the fraction: ₹30,000 ÷ 1/5 = ₹150,000. Option A is correct. Option B, ₹30,000, is only the new partner’s capital, not the whole firm’s estimated capital. Option C, ₹60,000, corresponds to doubling the amount and ignores the 1/5 share. Option D, ₹120,000, also does not satisfy 1/5 of the total being ₹30,000; one-fifth of ₹120,000 is only ₹24,000. Exam cue: total amount = partner’s amount ÷ partner’s fraction.

Correct answer: A. ₹2,80,000

The new partner’s capital represents \(1/4\) of the firm’s estimated total capital. Therefore, total capital = ₹70,000 ÷ \(1/4\) = ₹2,80,000. Multiplying ₹70,000 by \(1/4\) would give ₹17,500, which is not the total capital. Exam tip: To find the whole amount when a partner’s capital for a specific share is given, divide that capital by the share.

Correct answer: A. ₹25,000

Hidden goodwill = estimated total capital − actual total capital. Therefore, ₹1,80,000 − ₹1,55,000 = ₹25,000, so option A is correct. ₹3,35,000 is the sum of the two amounts, not their difference. Exam tip: subtract the actual capital from the estimated total capital.

Correct answer: A. Zero

Hidden goodwill = Estimated total capital − Actual total capital. When both capital amounts are equal, their difference is zero; therefore, hidden goodwill is zero. Hence, option A is correct. Exam tip: Hidden goodwill arises only when the estimated total capital exceeds the actual total capital.

Correct answer: A. New partner's Capital or Current Account

If cash is not brought, goodwill is adjusted through new partner's account. Old partners are credited in sacrificing ratio.

Correct answer: A. ₹8,000

The balance goodwill amount is calculated as: total goodwill − cash brought = ₹20,000 − ₹12,000 = ₹8,000. Therefore, ₹8,000 will be adjusted through the new partner’s account. Exam tip: For partial payment of goodwill, subtract the cash brought from the total goodwill amount.

Correct answer: A. Debit

When the incoming partner brings any part of the goodwill premium in cash, cash enters the firm. An increase in an asset is recorded on the debit side, so Bank Account is debited. The corresponding credit is normally given to the incoming partner’s capital or current account, depending on the exact arrangement. If the full premium is not brought in cash, the unpaid or remaining amount may be adjusted through the partner’s accounts according to the partnership agreement.

The relevant entry for the cash portion is generally: Bank Account Dr. to Incoming Partner’s Capital or Current Account. Bank is not credited because the firm is receiving money, not paying it out. “Suspended” and “closed” do not describe the normal treatment of a bank account in this transaction. Therefore, option A is correct. The important rule is that receipt of cash increases bank balance and requires a debit.

Correct answer: A. Credit

When the goodwill premium is withdrawn, money leaves the firm’s bank account. A decrease in an asset is credited, so the entry is: Old Partners’ Capital Accounts Dr. To Bank Account. Therefore, Bank Account appears on the credit side. Exam tip: Cash or bank outflow is recorded on the credit side of the Cash or Bank Account.

Correct answer: A. Debit

Goodwill premium is first credited to the old partners’ capital accounts. When they withdraw the amount, their capital decreases; therefore, their capital accounts are debited and the Bank/Cash Account is credited. Exam tip: a decrease in a partner’s capital is recorded on the debit side.

Correct answer: A. Zero

Depositing the premium increases the Bank balance by ₹16,000, while withdrawing the entire amount decreases it by ₹16,000. Therefore, the net effect is ₹16,000 − ₹16,000 = zero. Exam tip: Record the deposit and withdrawal separately, then calculate their net effect on the Bank account.

Correct answer: A. In old ratio

When sacrifice is in old ratio, sacrificing ratio is also the old ratio. So premium will be distributed in old ratio.

Correct answer: A. Nothing

Premium for goodwill is only for sacrificing partners. A non-sacrificing partner gets no share.

Correct answer: A. \(\frac{1}{5}\)

The sum of the terms in the new ratio 3:1:1 is 5. The third partner’s term is 1, so his share of the total profit is \(\frac{1}{3+1+1}=\frac{1}{5}\). \(\frac{1}{3}\) is incorrect because the share is calculated using the total of the ratio terms, not the number of partners. Exam tip: A partner’s profit share equals his ratio term divided by the sum of all ratio terms.

Correct answer: A. ₹17,000

The total parts in the new ratio 3:1:1 are 5. The third partner’s share is 1/5. Therefore, goodwill attributable to this share = ₹85,000 × 1/5 = ₹17,000. Option D incorrectly uses a 1/2 share, which is not indicated by the ratio. Exam tip: Multiply total goodwill by the partner’s ratio share, that is, the partner’s part divided by the total parts.

Correct answer: A. Because it compensates the old partners for their sacrifice

Goodwill premium is a capital adjustment connected with the admission of a new partner, not revenue generated by the firm’s ordinary operating activities. The incoming partner obtains a right to share future profits, and this may reduce the future profit shares of the existing partners. The premium is therefore credited to the old partners in their sacrificing ratio as compensation for the share they surrender. It is not sales revenue, a bank loan, or salary income. Treating it as normal income would incorrectly increase the firm’s operating profit and would ignore the direct compensation due to the sacrificing partners. Hence option A is correct.

Correct answer: A. Temporary adjustment account

Premium Account is used to receive and distribute amount to old partners. It is closed after distribution.

Correct answer: A. Adjust goodwill directly through capital accounts

In many questions, goodwill is adjusted directly through capital. Always read the wording carefully.

Correct answer: A. New partner pays and sacrificing old partners benefit

The new partner gets a future profit share, so he pays. Sacrificing old partners receive the benefit.

Correct answer: A. New partner's profit share

The new partner's goodwill is based on the profit share he receives. In exams multiply total goodwill by the new share.

Correct answer: A. (₹9000)

New partner's goodwill is (₹90000 \times 1/10=₹9000). Premium is calculated from the new profit share.

Correct answer: A. Old partners have sacrificed profit share

Sacrificing ratio shows how much profit share old partners gave up. Therefore premium is given in that ratio.

Correct answer: A. ₹6,000

The goodwill premium is distributed among the old partners in their sacrificing ratio. The total ratio is \(2+5=7\), so the first partner’s share is \(\frac{2}{7}\). Therefore, his share is \(₹21,000 \times \frac{2}{7}=₹6,000\). ₹15,000 is the second partner’s share, not the first partner’s. In the exam, first add the ratio terms and then multiply the premium by the relevant fraction.