CBSE Class 12 Accountancy Admission Of A Partner Important Questions Set 01

Very Short Answer Questions (1 Mark)

Question 1. State whether the statement is True or False: Goodwill is a fictitious asset.
Answer:
False

Teacher's Note:
1. Goodwill is an intangible asset because it has a value and can be sold.

Question 2. State whether the statement is True or False: Weighted Average Profit method of calculating goodwill is used when profits show a trend of financial performance.
Answer:
True

Teacher's Note:
1. When profits show a rising or falling trend, more weight is given to recent years.

Question 3. State whether the statement is True or False: Purchased goodwill arises at the time of opening of a new business.
Answer:
False

Teacher's Note:
1. Purchased goodwill arises when an existing business is acquired for more than its net assets.

Question 4. State whether the statement is True or False: Goodwill can be defined as the present value of anticipated profits.
Answer:
True

Teacher's Note:
1. Goodwill reflects the firm’s ability to earn future profits.

Question 5. State whether the statement is True or False: Under capitalisation of Super Profit method, goodwill is ascertained by capitalising the Super Profit on the basis of Normal Rate of Return.
Answer:
True

Teacher's Note:
1. Goodwill = Super Profit × 100 ÷ Normal Rate of Return.

Question 6. Fill in the blank: A change in profit-sharing ratio among the existing partner results in ________ of the partnership firm.
Answer:
Reconstitution

Teacher's Note:
1. The firm continues; only the partnership agreement changes.

Question 7. Fill in the blank: ________ is the excess of actual profit over the normal profit.
Answer:
Super Profit

Teacher's Note:
1. Super profit is calculated on average (actual) profit, not on a single year’s profit.

Question 8. Fill in the blank: In a partnership firm, total tangible assets are ₹14,00,000 and outside liabilities are ₹4,00,000 then capital employed will be ₹ ________.
Answer:
Capital employed = 14,00,000 − 4,00,000 = ₹10,00,000

Teacher's Note:
1. Capital employed = total assets (excluding goodwill and fictitious assets) − outside liabilities.

Question 9. Fill in the blank: Under ________ method goodwill is the excess of capitalised value of business over net assets.
Answer:
Capitalisation of Average Profit

Teacher's Note:
1. Capitalised value = Average Profit × 100 ÷ Normal Rate of Return.

Question 10. Fill in the blank: X, Y and Z are partners sharing profits in the ratio of 5 : 3 : 2. Then they decided to share profit equally in future. In this case X’s sacrifice is ________.
Answer:
X’s sacrifice = \( \frac{5}{10} \) − \( \frac{1}{3} \) = \( \frac{15}{30} \) − \( \frac{10}{30} \) = \( \frac{5}{30} \)

Teacher's Note:
1. \( \frac{5}{30} \) can also be written as \( \frac{1}{6} \).

Question 11. What is meant by ‘reconstitution of partnership firm’? [CBSE Delhi 2014]
Answer:
Whenever there is a change in the partnership agreement among partners but the firm continues, it is called reconstitution of the partnership firm.

Teacher's Note:
1. Key phrase for full marks: the agreement changes but the firm continues.

Question 12. State any two occasions on which a firm can be reconstituted. [CBSE Delhi 2012]
Answer:
Following are the occasions when reconstitution of a partnership firm can take place:
(i) Change in profit-sharing ratio among existing partners.
(ii) At the time of admission of a partner.

Teacher's Note:
1. Other occasions are retirement or death of a partner and amalgamation of firms.

Question 13. State the ratio in which the partners share profits or losses on revaluation of assets and liabilities, when there is a change in profit-sharing ratio amongst existing partners. [CBSE Delhi 2013]
Answer:
In Old Profit-Sharing Ratio.

Teacher's Note:
1. Revaluation relates to the period before the change, so the old ratio applies.

Question 14. What is Sacrificing Ratio? [CBSE (AI) 2008, 2011]
Answer:
The ratio in which one or more of the existing partners surrender some of their old share in favour of one or more other partners is called sacrificing ratio. Sacrificing ratio is computed by deducting the new ratio from the old ratio.

Teacher's Note:
1. Write the formula too: Sacrificing Ratio = Old Ratio − New Ratio.

Question 15. Define goodwill. [CBSE (AI) 2008]
Answer:
Goodwill is the value of reputation of a firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same industry.

Teacher's Note:
1. The idea of “profits over and above normal profits” is what links goodwill to the super profit method.

Question 16. Why is ‘goodwill’ considered an ‘Intangible asset’ but not a ‘fictitious asset’? [CBSE Delhi 2009]
Answer:
Goodwill cannot be seen and touched. It is invisible. Hence, it is treated as intangible asset. But it is not a fictitious asset because goodwill has a value and it can be purchased or sold with any other asset.

Teacher's Note:
1. A fictitious asset has no realisable value; goodwill does.

Question 17. Give the formula of goodwill by ‘Capitalisation of Average Profits’. [CBSE Delhi and (AI) 2012 (C)]
Answer:
Goodwill = Capitalised Value of Average Profits − Net Assets
Where,
Capitalised Value of Average Profit = \( \frac{\text{Average Profit}}{\text{Normal Rate of Return}} \) × 100
Net Assets = All assets (other than goodwill, Fictitious assets and non-trading investments) at their current values less outside liabilities.

Teacher's Note:
1. Remember to exclude goodwill and fictitious assets while computing net assets.

Short Answer Questions (2 Marks)

Question 18. A business has earned average profits of ₹1,00,000 during the last few years and the normal rate of return in similar business is 10%. Find out the value of goodwill by:
(i) Capitalisation of Super Profit Method and
(ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profit.
The assets of the business were ₹10,00,000 and its external liabilities ₹1,80,000. [CBSE Delhi 2011]
Answer:
(i) (a) Capital Employed = Assets − External Liabilities = ₹10,00,000 − ₹1,80,000 = ₹8,20,000
(b) Normal Profit = Capital Employed × \( \frac{\text{Normal Rate of Return}}{100} \) = ₹8,20,000 × \( \frac{10}{100} \) = ₹82,000
(c) Super Profit = Actual Average Profit − Normal Profit = ₹1,00,000 − ₹82,000 = ₹18,000
As per Capitalisation Method,
Goodwill = Super Profit × \( \frac{100}{\text{Normal Rate of Return}} \) = 18,000 × \( \frac{100}{10} \) = ₹1,80,000
(ii) As per Super Profit Method
Goodwill = Super Profit × No. of years’ purchase = ₹18,000 × 3 = ₹54,000

Teacher's Note:
1. Capitalising the super profit and multiplying it by years’ purchase are two different methods; read which one is asked.

Question 19. The average profit earned by a firm is ₹80,000 which includes undervaluation of stock of ₹8,000 on an average basis. The capital invested in the business is ₹8,00,000 and the normal rate of return is 8%. Calculate goodwill of the firm on the basis of 7 times the super profit. [CBSE Delhi 2015 (C)]
Answer:
Average Profit = ₹80,000
Undervaluation of Stock = ₹8,000
Actual Average Profit = ₹80,000 + ₹8,000 (Note) = ₹88,000
Normal Profit = Capital Investment × Normal Rate of Return = ₹8,00,000 × \( \frac{8}{100} \) = ₹64,000
Super Profit = Actual Average Profit − Normal Profit = ₹88,000 − ₹64,000 = ₹24,000
Goodwill = Super Profit × 7 = ₹24,000 × 7 = ₹1,68,000
Note: Undervaluation of stock is added back to the profit as it reduces the profit.

Teacher's Note:
1. Undervalued closing stock understates profit, so add it back; overvalued stock would be deducted.

Teacher's Note:
1. Abnormal gains are deducted and abnormal losses are added back to arrive at normal profits.

Teacher's Note:
1. Divide by the total of the weights (15), not by the number of years (5).

Short Answer Questions (3 Marks)

Teacher's Note:
1. A loss year is subtracted while totalling profits for the average – do not add it.

Teacher's Note:
1. Partners’ remuneration is deducted from profits before valuing goodwill because it is a normal cost of running the business.

Teacher's Note:
1. When the claim exceeds the Workmen Compensation Fund, the excess is a loss debited to the Revaluation Account.

Teacher's Note:
1. Debit balances like Advertisement Suspense and a debit P&L are losses, so partners’ capitals are debited in the old ratio.

Teacher's Note:
1. When market value is more than book value, the whole Investment Fluctuation Reserve goes to the old partners and the increase in investments is a revaluation gain.

Long Answer Questions (5 Marks)

Teacher's Note:
1. The reserve is always shared in the old ratio, whatever the new ratio is; only the surplus over the claim goes to the partners.

Teacher's Note:
1. Compare the fall in value with the reserve: the reserve absorbs the fall first, any excess reserve goes to partners, and any shortfall is a revaluation loss.

Teacher's Note:
1. Capitalisation of super profit and capitalisation of average profit always give the same goodwill – a quick check of your arithmetic.

Teacher's Note:
1. New capitals are found by dividing the total adjusted capital (₹12,70,000) in the new ratio; the differences go to current accounts.

Teacher's Note:
1. Writing off creditors that will not be claimed reduces a liability, so it is a gain on revaluation.

Teacher's Note:
1. Because revaluation profit and goodwill are both shared in the sacrificing/gaining ratio here, they can be added and adjusted by one entry.

Teacher's Note:
1. Check: A = 1,00,000 + 16,500 + 15,000 + 25,000 = ₹1,56,500 – reserve, revaluation profit and goodwill all reach the capital account.

Teacher's Note:
1. Since capitals are adjusted through cash, the cash brought in and paid off cancel out, so total capital stays ₹21,50,000.

Teacher's Note:
1. A partner’s debit current account balance is shown on the assets side, which is why the Balance Sheet total rises to ₹8,14,000.