Multiple Choice Questions
Q1. A firm’s profit for the last three years are: 1,00,000, 2,00,000 and 3,00,000. What is the value of Goodwill, if it is calculated on the basis of four years purchase of the average profits of the last 3 years? (1st June, 2023)
(a) 10,00,000
(b) 8,00,000
(c) 4,00,000
(d) 3,00,000
Q2. Identify the term that indicate change in existing profit- sharing ratio among partners. (2nd June, 2023)
(a) Dissolution of Partnership Firm
(b) Dissolution of Partnership
(c) Amalgamation of Partnership Firm
(d) Valuation of Firm
Q3. At the time of change in profit sharing ratio, existing goodwill is written off among the partners in: (5th June, 2023)
(a) Sacrificing Ratio
(b) Equal Ratio
(c) Old Ratio
(d) Gaining Ratio
Q4. Firm’s capital in a business is 2,00,000. The normal rate of return on firm capital is 15%. During the year the firm earned a profit of 48,000. Calculate goodwill on the basis of 3 years purchase of super profit (5th June, 2023)
(a) 54,000
(b) 1,44,000
(c) 90,000
(d) 18,000
Q5. A business has earned average profits of 2,50,000 during the last few years. The firm has assets of 25,00,000 and external liabilities of 4,50,000. The similar business has rate of return of 10%. Calculate value of Goodwill by Capitalisation method: (5th June, 2023)
(a) 4,50,000
(b) 5,00,000
(c) 2,50,000
(d) 3,50,000
Q6. Identify the option which is not appropriate related to goodwill of a partnership firm, its features and also its treatment. (5th June, 2023)
(a) Goodwill is a fictitious asset not an intangible asset.
(b) There are only two types of Goodwill. One is purchased goodwill and another self generated goodwill.
(c) Goodwill of the firm can be affected due to favourable location and good contracts.
(d) Accounting standard-26 is applicable for the treatment of Goodwill.
Q7. A firm’s balance sheet shows the following: Workmen Compensation Reserve 70,000 Workmen Compensation claim 90,000. State the journal entry to be passed at the time of Reconstitution of firm (5th June, 2023)
(a) Debit Workmen Compensation Reserve A/c 70,000 and Revaluation A/c 20,000; Credit Workmen Compensation claim 90,000
(b) Debit Workmen Compensation Reserve A/c 90,000 Credit Workmen Compensation A/c 90,000;
(c) Debit Workmen Compensation Reserve A/c 70,000
(d) Debit Workmen Compensation claim A/c 70,000 and Realisation A/c 20,000; Credit Workmen Compensation Reserve 90,000
Q8. Under capitalisation method of calculating goodwill, the term capital refers to: (7th June, 2023)
(a) Amount standing to the credit of capital account of partners
(b) Total assets minus liabilities
(c) Total assets excluding goodwill and fictitious assets minus outsiders’ liabilities
(d) Capital calculated on the basis of new partner’s capital and his share of profit
Q9. In case of change in profit sharing ratio among partners in a firm, the Stock stood at 55,000 in the Balance Sheet of the old firm and at the time of reconstitution, it was observed that Stock was overvalued by 10%. Identify the correct option with respect to treatment of stock in Revaluation Account. (10th June, 2023)
(a) Stock A/c will be debited by 5,500
(b) Stock A/c will be credited by 5,000
(c) Stock A/c will be debited by 5,000
(d) Stock A/c will be credited by 5,500
Q10. Hidden Goodwill is: (11th June, 2023)
(a) Not disclosed to partners
(b) Inferred from the arrangement of capital and profit- sharing ratio.
(c) Brought into the book of accounts as an unrecorded Assets
(d) Not considered while calculating the capital contribution of new partner
SOLUTIONS
Q. 1. Answer (b)
Solution – Average Profits = 1,00,000 + 2,00,000 + 3,00,000 / 3 = 2,00,000
Goodwill = Average profits × no. of years purchase
Goodwill = 2,00,000 × 4 = 8,00,000
Q. 2. Answer (b)
Solution – The term that indicates a change in existing profit- sharing ratio among partners is Dissolution of Partnership.
Q. 3. Answer (c)
Solution – When there is a change in the profit- sharing ratio among partners, and the existing goodwill is written off, it is written off among the partners in the Old Ratio.
Q. 4. Answer (a)
Solution – Normal Profit = Capital Employed × Normal Rate of return / 100
Normal Profit = 2,00,000 × 15/100 = 30,000
Super Profit = Actual profit – Normal Profit = 48,000 – 30,000 = 18,000
Goodwill = Super profit × No. of Years purchase
Goodwill = 18,000 × 3 = 54,000
Q. 5. Answer (a)
Solution – Capitalised Value of average profits = Average profits × 100/NRR = 2,50,000 × 100/10 = 25,00,000
Capital Employed = Assets – External Liabilities
Capital Employed = 25,00,000 – 4,50,000 = 20,50,000
Goodwill = Capitalised Value of average profits – Capital Employed
Goodwill = 25,00,000 – 20,50,000 = 4,50,000
Q. 6. Answer (a)
Solution – Goodwill is a fictitious asset not an intangible asset: This statement is not accurate. Goodwill is indeed considered an intangible asset in accounting, not a fictitious asset.
Q. 7. Answer (a)
Solution – When the claim for Workmen Compensation is more than that of reserve, the difference is transferred to Revaluation account.
Journal Entry:
Workmen Compensation Reserve A/c Dr. 70,000
Revaluation A/c Dr. 20,000
To Workmen Compensation claim 90,000
Q. 8. Answer (c)
Solution – In the context of calculating goodwill using the capitalization method, the term “capital” refers to the total capital employed in the business, which is calculated as the total assets (excluding goodwill and fictitious assets) minus the liabilities owed to outsiders.
Q. 9. Answer (b)
Solution – Value of stock at 55,000 is overvalued which means the actual value of Stock must be less than 55,000. This will cause a reduction in the value of stock. Therefore, the stock should be credited in revaluation account.
Amount by which Stock should be credited = 55,000 × 10/110 = 5,000
Q. 10. Answer (b)
Solution – Hidden Goodwill refers to the goodwill that is inferred from the arrangement of capital and profit- sharing ratios.
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