Goodwill Accounting

Correct answer: A. New partner's capital or current account

Unbrought premium is adjusted through the new partner's account. This amount is credited to old partners in sacrificing ratio.

Correct answer: A. ₹5,000

C’s share of goodwill is ₹1,20,000 × 1/6 = ₹20,000. Since C brings only ₹15,000 in cash, unbrought goodwill = ₹20,000 − ₹15,000 = ₹5,000. Remember that unbrought goodwill is the difference between the incoming partner’s share of goodwill and the amount actually brought in cash.

Correct answer: A. Old partners gave profit share without adequate compensation

When the new partner pays less but gets more share, he gains. This bonus is linked with old partners' sacrifice.

Correct answer: A. Extra benefit from new partner to old partners

Excess premium gives extra compensation to old partners. It is adjusted in capital accounts as per the situation.

Correct answer: A. Because premium is compensation for sacrifice

Goodwill premium compensates the share sacrificed by old partners. Therefore sacrificing ratio is the correct basis.

Correct answer: A. (1/10)

The direct answer is option A, 1/10. Sacrifice means the portion of profit that an old partner gives up for the incoming partner. The formula is Sacrifice = old share − new share. A’s old share is 3/5 and his new share is 1/2. Convert them to a common denominator: 3/5 = 6/10 and 1/2 = 5/10. Now subtract: 6/10 − 5/10 = 1/10. Thus A sacrifices 1/10. Option A is correct. Option B, 1/2, is merely A’s new share, not the amount given up. Option C, 3/10, is not obtained by subtracting the two fractions; it ignores the correct common-denominator calculation. Option D, 11/10, is impossible here because it is greater than one whole and results from adding rather than subtracting the shares. The concept is important: a decrease in an old partner’s share is sacrifice, while an increase would be gain. Memory cue: old minus new equals sacrifice.

Correct answer: A. 1/10

A partner’s sacrifice is the old share minus the new share. For B, 2/5 − 3/10 = 4/10 − 3/10 = 1/10, so B’s sacrifice is 1/10 of the profits.

Correct answer: A. Gain

The direct answer is A: it is called gain. In partnership reconstitution, compare an old partner’s new profit share with the old share. If the new share is larger, the partner has received an additional portion from another partner; this increase is called gain. Option A is correct. Option B, sacrifice, means the opposite: the new share is smaller than the old share. Option C, goodwill premium, is money or value connected with goodwill and is not the name for an increase in a partner’s profit share. Option D, drawings, means withdrawals made by a partner for personal use and has no connection with this comparison. A gaining partner may compensate the sacrificing partner for the benefit received; the statement does not describe drawings. Memory cue: new share minus old share = gain; old share minus new share = sacrifice.

Correct answer: A. In sacrifice share decreases and in gain share increases

Sacrifice is important for goodwill compensation on admission. Gaining ratio is mostly used in retirement or death.

Correct answer: A. A alone sacrifices

A and B originally share profits in 4:1, but C’s entire 1/5 share is taken from A alone. This means A gives up 1/5 of the firm’s profit, while B gives up nothing. Sacrifice is identified by finding whose old share decreases when the new partner is admitted. The old ratio does not mean that both partners must sacrifice in that same ratio.

A’s new share becomes \\(4/5-1/5=3/5\\), while B remains at \\(1/5\\). Thus A’s sacrifice is \\(1/5\\) and B’s sacrifice is zero. The sacrificing ratio can therefore be described as A alone, so option A is correct. Any goodwill premium brought by C for this share is credited to A, because A alone has surrendered the profit entitlement.

Correct answer: A. 7/30

B’s old share under the 3:2 ratio was 2/5. Since C receives 1/6 of the total profit entirely from B, B’s new share is 2/5 − 1/6 = 12/30 − 5/30 = 7/30. Thus, 2/5 represents B’s old share, not his new share. Exam tip: convert both shares to a common denominator before subtracting the sacrificed share.

Correct answer: A. Because unnecessarily showing goodwill in books is not proper

In practice, goodwill account is shown only when necessary. Most adjustments are made through capital accounts.

Correct answer: A. Compensation for sacrifice by old partners

The main idea of goodwill is fair compensation for sacrifice. Always check who sacrificed how much share.

Correct answer: A. Through current accounts

Under fixed capital method, regular adjustments are made through current accounts. So goodwill adjustment may appear in current accounts.

Correct answer: A. Old partners capital accounts

Under fluctuating capital method, adjustments are made directly through capital accounts. So premium is credited to old partners' capital accounts.

Correct answer: A. Added back to profit

The direct answer is A: abnormal loss is added back to profit when calculating average profit. Average profit is meant to show normal, recurring earning capacity. An abnormal loss is unusual and does not represent ordinary performance. If it reduced a year’s reported profit, we reverse its effect by adding it back before finding the average. For example, if profit after an abnormal loss is ₹40,000 and the loss is ₹10,000, the adjusted profit is ₹50,000. Option A is correct. Option B deducts the loss twice, which unfairly lowers normal profit. Option C is wrong because the loss cannot simply be ignored; its effect must be corrected. Option D concerns goodwill treatment, not the calculation of average profit. Remember: abnormal expense or loss is generally added back; abnormal income is deducted.

Correct answer: A. Deducted from profit

The average profit method estimates goodwill from a representative maintainable profit, so unusual or non-recurring items must be removed from the historical figures. An abnormal gain is an exceptional profit that is unlikely to continue in normal future operations. Consequently, it is deducted from the relevant year’s profit before the average is calculated. This prevents the estimated maintainable profit and goodwill from being overstated. An abnormal loss would generally be added back. The item is not adjusted against capital and is not distributed in the sacrificing ratio. Therefore option A is correct.

Correct answer: A. ₹60000

Average profit = Total adjusted profit ÷ Number of years. Therefore, ₹240000 ÷ 4 = ₹60000. Option B represents the total profit, not the average, while options C and D result from incorrect division. In exams, always divide the total adjusted profit by the number of years used.

Correct answer: A. Approximately ₹43,333

A weighted average gives greater importance to the observations carrying larger weights. First calculate the weighted total: (₹30,000 × 1) + (₹40,000 × 2) + (₹50,000 × 3) = ₹30,000 + ₹80,000 + ₹1,50,000 = ₹2,60,000. The total of the weights is 1 + 2 + 3 = 6. Thus, weighted average profit = ₹2,60,000 ÷ 6 = ₹43,333.33, or approximately ₹43,333. Therefore, option A is correct. Option B is only one of the listed profits. Option C is the weighted total before division, and option D does not follow the weighted-average formula. The larger weight assigned to ₹50,000 appropriately raises the average above the ordinary middle value.

Correct answer: A. Capital employed × normal rate of return

The direct answer is option A: Capital employed × normal rate of return. Normal profit is the profit that a business is expected to earn under ordinary conditions on the capital used in the business. The calculation is Normal profit = Capital employed × Normal rate of return ÷ 100, when the rate is stated as a percentage. For example, capital employed of ₹5,00,000 at 10% gives ₹50,000 normal profit. This amount is compared with average actual profit to find super profit. Option A is correct because it directly uses the two required factors. Option B, average profit × years’ purchase, is a goodwill valuation formula, not a normal-profit formula. Option C, goodwill × new share, calculates the incoming partner’s share of goodwill, not normal profit. Option D, premium ÷ sacrificing ratio, does not measure the return expected from capital and is not a normal-profit formula. First calculate normal profit; then compare it with actual or average profit. The exam cue is: normal profit is the ordinary return on capital employed.

Correct answer: A. ₹40000

Super profit = Average profit − Normal profit = ₹85000 − ₹65000 = ₹20000. Goodwill = Super profit × Number of years’ purchase = ₹20000 × 2 = ₹40000. Therefore, option A is correct. ₹20000 is only the super profit, not the value of goodwill. In the examination, calculate super profit first and then multiply it by the years’ purchase.

Correct answer: A. ₹80,000

The ₹20,000 premium represents C’s 1/4 share of the firm’s total goodwill. Thus, total goodwill = ₹20,000 ÷ 1/4 = ₹80,000.

Correct answer: A. Premium for Goodwill Account

In the first entry, Bank is debited and Premium account is credited. Later the premium is distributed to old partners.

Correct answer: A. Because premium is compensation to old partners

Premium is not sale of an asset but compensation for sacrifice. It is ultimately credited to old partners.

Correct answer: A. ₹20000

When old goodwill already appears in the balance sheet and is written off at admission, it is removed through the partners’ capital or current accounts in their old profit-sharing ratio. The old ratio is 2:1, so the total of three parts represents the entire goodwill of ₹30,000. A is entitled to two of those three parts.

A’s debit is therefore \\(₹30,000\\times2/3=₹20,000\\). B would bear the remaining ₹10,000. The debit reflects the reduction of the old goodwill asset from the books; it is not based on the new partner’s share or on equal distribution. Consequently, option A, ₹20,000, is the correct amount for A.